Opinion: Contractual cost control
When finances are squeezed, outsourcing becomes increasingly important as a strategic option for businesses to control costs.
However, it’s rarely possible for any organisation to get a new outsourcing programme up and running at short notice, so if immediate financial payback is important, attention should turn to the outsourcing arrangements that are already in place. So what areas of existing contracts should customers look at to ensure that they’re getting maximum value? Kit Burden, partner, DLA Piper, examines the options:
When thinking of cost control and reduction, attention will generally turn first to the benchmarking clause; this generally allows for the service provider’s charges and services to be reviewed against those of its competitors to determine whether they still represent value for money to the customer. If the current economic slowdown continues, the supplier community will have fewer client prospects to chase after, and increased competition will force them to be correspondingly keener in their pricing.
Before jumping to benchmark a service provider, customers should analyse the scope of their contractual benchmarking provisions. They may, for example, ask whether a specific part of the charges/services be benchmarked, or must it cover the entirety of the contract? Are there any restrictions on who can be used as a ‘comparator’? They should ask, too, what the basis is for comparison; should the service provider demonstrate that its charges are the best of all comparables, or should they be in line with the” average”? Most importantly, who bears the cost of the benchmarking process, and will the service provider be obliged to lower its costs in the event of an “adverse” finding?
In certain contracts, the service provider may have committed to make efficiency or productivity-related savings. In many cases these are ‘soft’ obligations, but can still be used to put pressure upon the service provider to demonstrate exactly what it has done to offer best value ongoing. In other cases, they may be binding obligations, which can be enforced accordingly.
Another possibility for achieving cost reductions is to look at the charging structure itself. Increasingly, outsourcing deals are set out (wholly or partially) on a transaction-based model, which will reduce the charges if volumes are reduced; payment to the service provider goes up or down in line with demand. There’s often scope for those arrangements that don’t follow this model to move to it in future.
Revisit your options
Even if none of the above options are available to a customer, hope is not lost. There remains the leverage associated with retendering and contract extensions. The service provider will be loath to lose an existing contract, while the customer can offer up the possibility of an extension to the existing contract term or possibly even the extension of the current scope of services so as to incorporate additional activities, but only on the basis of a reduction being made to the current level of charges.