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Outsource magazine: thought-leadership and outsourcing strategy | August 19, 2017

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Don’t let the impending expiration of a BPO contract sneak up on you

Don’t let the impending expiration of a BPO contract sneak up on you
Outsource Magazine

BPO customers often miss out on a key opportunity for significant outsourcing relationship enhancement, cost savings, and quality improvement – well before the contract expiration. By the time most companies begin to think about evaluating their expiring BPO contracts, it’s often too late to do anything about it. The default reaction is typically to renew or extend the existing agreement, which further commits the buyer to rates and terms that are likely no longer competitive with the market, locking it into an increasingly unfavorable deal for one or several more years.

Depending on the services being performed by the outsourcer, it may require a year or longer to be in a position to responsibly transition away from an incumbent. To have sufficient time to pursue any available option – renewal, modification, or termination – a buyer needs to account for the amount of time it takes to (i) assess the existing relationship; (ii) engage the incumbent in structured extension / renewal discussions; and (iii) still have enough time for a legitimate threat of competition and migration, where the RFP process and subsequent disengagement activities themselves may take more than 12 months.

Awareness and preparation are a buyer’s most valuable weapons, and the actions taken at various points throughout the outsourcing contract lifecycle will determine whether that buyer is stuck with a suboptimal contract for another year (or more), or uses an impending expiration as a catalyst to increase the overall value of the relationship and resurrect the business case.

Summarise the Contract (Upon Execution)
Buyers need to understand key elements of the BPO contract to be in a position to pursue any of the available termination and extension options, including the expiration date of the agreement (or a specific Statement of Work), extension / renewal options (e.g., a certain number of years, month-to-month), and notification periods (e.g., upon 90-day written notice).  The easiest time to memorialise this is upon contract execution, when the contract is fresh in the mind of the buyer contracting team.  A contract overview should be created, summarising key deal points and milestones, and should be monitored periodically by the governance team to ensure no surprises.  Ensuring these key terms and a critical contract path are understood and proactively managed allows a buyer to initiate any provider discussions with plenty of time to do something about it if the provider chooses not to be cooperative.

Take a Mid-Term Exam
Contract expiration is only one of many possible triggers that may be available to BPO buyers.  There are other potential options that provide leverage for upcoming renewal / extension discussions, including several potential mechanisms to drive benefits mid-term. Once minimum revenue commitments are met (term commitments, not annual) there may be an ability to exit the contract even prior to expiration. Similarly, if the termination for convenience fee schedule is favorable, where it becomes zero or de minimis at a particular point in time prior to contract expiration, it could create leverage to renegotiate key deal points mid-term. Additionally, there may be mechanisms to effectively ramp down services (assuming no fees for partial termination of services) so that there is a minimal base (“maintenance”) charge that may be more than offset by the savings obtained through market-competitive pricing. None of these elements force a buyer to terminate services and migrate to an alternate provider, but they do provide options that could ultimately result in more favorable rates, service quality, and terms.

Poll the Audience
When evaluating how to proceed with an expiring contract, it is important to reach out broadly to internal stakeholders that have perspectives about how the provider is performing. If a provider is performing well and internal constituents are generally satisfied with the level of service, the barrier to change becomes more significant. If constituents are dissatisfied with the provider, more evaluation is necessary to determine the causes of dissatisfaction. Is it that the provider is not meeting its contractual commitments, or are there other causes of dissatisfaction that may have nothing to do with performance obligations? It is also important to determine whether stakeholders view the provider consistently, or whether there is a stratified perception of performance. The information obtained from this outreach is instrumental to identifying issues that need to be addressed with the provider about expectations during any extension / renewal term. It’s also important to make sure the right tone is established with the provider – consistent with the amount of leverage the buyer has – depending on whether the objective is wholesale change, minor tweaks, or something in between.

Identify Points of Leverage
Evaluating how much negotiating leverage a buyer has and developing an engagement strategy consistent with the buyer’s position is key. Dimensions to explore include the amount of time remaining on the contract (less than 12 months significantly reduces leverage), how commoditised (and therefore readily available) the outsourced services are, the provider’s historical performance and compliance with contractual terms (are they or have they been in breach), and financial provisions that may make it more (or less) costly for the buyer to exit the contract (such as buy-out fees). Many contracts also include benchmarking provisions that allow buyers to evaluate their rates compared to the boarder marketplace for services that are similar in nature (e.g., scope, quality). At best, benchmarking can be used to secure mid-term rate improvements (although many benchmarking clauses are very restrictive and make resultant price reductions difficult to secure), but at worst they can be used to identify the magnitude of cost reduction opportunity by going out to the market.

The legitimate threat of competition, such as administering an RFP process, can be a key lever as providers realise how long it takes to exit a relationship and know when it’s too late to make a switch. Additionally, the barrier to change providers is typically quite high – both financially and in terms of business disruption. This often works in a provider’s favour as it may be less likely to make significant concessions in the absence of compelling buyer leverage.

Most Importantly, Start Early
Providers typically invest most heavily in relationships when they’re (i) trying to win the work and (ii) when the contract is up for renewal, but if a buyer waits too long to explore options and initiate discussions, the leverage shifts heavily towards the provider as there isn’t enough time to make a switch even if it is warranted. Buyers should begin contract and relationship evaluations at least 18 months prior to their contract expiration date to reassess outsourcing objectives and overall performance expectations. This ensures sufficient time to identify contract and relationship gaps, evaluate alternative delivery, approaches and engage alternative providers (if appropriate).  Regardless of the opportunity to improve the relationship – including potentially lower costs, reduced risk, and improved service quality – the decision is already made by waiting too long.


About the Author

David Borowski 150David Borowski is a principal for optimisation and outsourcing advisory firm Pace Harmon.

Comments

  1. Tanuj Goyal

    It all boils down to effective governance of suppliers and management of contractual obligations in post procurement phases of sourcing. If you actively manage and govern your contract terms and SLAs and manage supplier relationship using automated supplier governance solution you would extract maximum value from your contracts and will also be able to take decisions regarding renewal/termination of contract well in advance.

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