By Katy Demong
Halfway through a five-year outsourcing contract might seem too early to begin planning an end-of-term strategy. But if you wait, as many companies do, until the final year notification period you could lose out on potential cost savings and negotiating leverage, says Robert Joslin, managing director at outsourcing consultancy Alsbridge. Even more importantly, he says, you’ll miss a crucial opportunity to update your strategy to cope with a rapidly changing world.
Joslin recommends beginning work on an ETS 24 to 30 months before the contract is up. If two plus years sounds like a lot of time to simply renew an outsourcing contract or negotiate a price reduction with a current provider, that’s because an end-of-term strategy calls for much more, he says.
“What organizations want to avoid is getting into a situation where they need to extend the current terms of the contract for a specified amount of time or on a month-to-month basis,” he says. When this happens, companies see pricing that is not optimized, experience degradation in the level of services, and relinquish negotiating power to the supplier.
Changing Business Needs
The average outsourcing contract is five to seven years. In that time, the needs of the company will most likely have changed, he says, “while the outsourcing contract is often static.”
A first step in planning for the end of a contract is a comprehensive review of internal changes such as new company goals, cost reduction requirements, additional regulatory constraints and changes in the type or scope of services the organization needs. “A client may decide to take more services in-house, or expand the range of services to outsource,” says Joslin.
The increase in the number and type of Business Process Outsourcing (BPO) providers may also affect the choice of future service providers, says Joslin. “If a company believes in having one primary supplier, and they are looking to outsource financial services and HR, the current provider may no longer be a good fit. The end-of-term strategy is the best time to re-align the internal goals externally with the supplier.”
“There are many new service providers…whose capabilities have matured, and consolidation among existing providers,” says Joslin. “There are also new geographies to be considered,” he said, noting the proliferation of suppliers in areas such as India, South America, and Eastern Europe, as well as new opportunities for offshore partnerships spawned by the Web and growing global technical skills.
Once companies examine internal changes and the changed marketplace, they can choose a strategy to best meet their new goals. Joslin outlined four main directions: restructure (negotiate a new contract with the current provider), recompete (find another provider or providers), repatriate (bring the work back in-house), or some combination of the three. That combination of strategies is what Joslin sees most often. “Be sure to look at all options,” he advises. “Don’t make any assumptions about what you think will be the best direction.” He added that even when contracting with the current provider, new contracts rarely turn out to be a simple renewal.
Make the Time
Companies need to leave time to create their strategy, restructure the goals of the existing contract, renegotiate that contract and transition to the new terms, and leave time to find another provider if the negotiation fails. Depending on the complexity of outsourcing needs and the company’s speed and ability to make decisions, this will usually take 24-30 months, he says, and rarely less than 18 months.
In addition to allotting enough time, Joslin warns companies not to treat their end of term strategy strictly as a pricing exercise. “There is a price reduction opportunity, but the strategy should be a holistic approach to reducing costs, exploring new delivery models, and addressing changes in the project scope.”
And, as with any task that needs to be completed, someone must be assigned to it. A combination of roles will likely need to be involved in seeing out an end-of-term strategy, says Joslin, including someone to represent the interests of the business/operations, finance and procurement, as well as one driver to lead the charge.