By Robert L. Scheier
Looking for how to renegotiate an outsourcing contract to reduce costs or improve a supplier’s performance? You’re not alone. Many customers are renegotiating contracts more often and earlier in the contract cycle, as both technology and business needs change more quickly.
Add the billions of dollars worth of contracts coming up for renegotiation in the next 12-18 months, and the fact that, according to attendees at Webinars sponsored by consultancy Alsbridge, 65 percent of customers have “pressing issues” with their outsourcing agreements. The biggest single source of problems, according to the respondents, was that their relationship with the service provider had “deteriorated a catch-all that can cover all sorts of sins. The next most common, at 22 percent, was that cost of services increasing.
A recent white paper from Alsbridge and a recent blog post from Deloitte pointed to some of the most common carrots and sticks customers are using to sweeten the post in their contract renegotiations.
Among the carrots:
- Adding new work or years to the contract, such as application rationalization or data center upgrades. Even if the work is at a lower price than in the original contract, said Alsbridge, it can increase the total contract value for the provider.
- Adding years to the contract.
- Offering to become an earlier customer for new services the provider is looking to develop, such as cloud delivery or Big Data analysis. This helps the provider build skills and create case studies while generating revenue, as long as you negotiate a discount to reflect the fact the provider is learning on your dime.
And among the sticks:
- If the provider is doing work outside the scope of the original contract, threaten to do it in-house or give it to another vendor.
- Threaten to stop serving as a reference customer. While you may not go public with your complaints (and be tainted by the bad press yourself) this can make it much harder for the provider to close new deals.
- And, of course, threaten to end the contract for cause or for convenience, penalties be damned.
Go for Win-Win
Deloitte Director Stephen Dunn argued against using too many sticks in a “tough guy” approach in favor of a “win-win” strategy. In this approach, which some call vested outsourcing, both sides identify areas where they can work together for improvement and share the gains. “
The Alsbridge numbers in fact point in this direction, with about half their Webinar attendees trying to improve the situation through improved governance, 29% looking to renegotiate and 15% looking to changes in provider staffing.
Under improved governance I’d list suggestions such as benchmarking to arm yourself with data in asking for improved service or lower prices, and clarifying what have been unclear responsibilities for services and deliverables.
In the spirit of win-win, I’d suggest some other carrots a customer can offer providers are:
- Closer contact with your customer-facing executives to help give the provider the industry-specific experience your vendor needs to compete.
- To share benchmarking data on price and performance the provider can use to help other customers reach best-in-industry results. Note this is the same kind of data many customers share, anonymously, among themselves now.
- Rather than paying the vendor per hour worked, pay them based on outcomes – even finding a way to reduce demand for their services, such as creating a self-service portal that cuts cal center volumes. Share enough of the savings with the vendor, of course, to more than make up for the lost revenue.
What carrots and sticks have worked best or worst with your providers? And does this win-win stuff work or is it just happy talk?