Should You Renew, Renegotiate Or Rebid Your Outsourcing Contract? |
(DALLAS, Texas) August 31, 2010 - According to Alsbridge, Inc. CEO Ben Trowbridge, "renewals aren't always the right answer."
Trowbridge goes on to explain that over that last five years service providers have become more efficient in providing higher quality services at a lower price. Additionally, outsourcing agreements have become more balanced and fair to both the customer and service provider.
Adds Trowbridge, "In order to take advantage of these gains, customers have to enter into tough negotiations and potentially a competitive procurement. Regardless, better contracts with price reductions as much 20 percent can't be ignored."
One of the most effective ways to begin is with a thorough market assessment. In other words, how does your contract compare to market agreements? Quality, efficiency, legal protection, and rates are all points for consideration.
So what is the right answer - Renew, Renegotiate or Rebid? Alsbridge shares the following insights:
Renew
Renewal is often the last option clients consider because it means accepting the current contract conditions with minimal changes. However, if your current agreement is reasonably consistent with similar market agreements and you have a positive relationship with your current service provider, contract renewal makes sense. You may also choose to renew your contract because business conditions are not favorable for changing service providers. However, renewal should not be a long term decision - perhaps one or two additional years at most. The better alternative is to renegotiate your agreement.
Renegotiate
Before choosing to renegotiate your outsourcing contract, you should seriously consider the strength of your relationship with your service provider. Is it a positive relationship? Is your provider willing to renegotiate and be market competitive? Even if you judge your relationship to be strong, it is critically important that you maintain your option for a competitive procurement and ensure that this is communicated to your service provider early in the process.
Recognizing that you have less leverage in a contract renegotiation than a rebid, there are some steps you can take to ensure a more competitive and fair agreement for all parties. First, use the information you obtained during the market assessment to define the key changes you want in your new agreement and consider the legal and business terms, pricing and service level agreement. Second, require the provider to respond to all the changes you are suggesting in writing. Third, based on the provider's response, establish the conditions you require to move forward with a renegotiation and require the provider's agreement.
If you are uncomfortable moving ahead with a contract renegotiation, strongly consider a competitive procurement. Otherwise, move forward with a very prescriptive process. Establish an aggressive schedule to complete the renegotiation, provide the amended legal agreement to the provider and require a response prior to the start of renegotiations. Clearly establish that you will use your option for a competitive agreement if the result of the renegotiation is not market competitive and not fair to both parties. It should also be noted that regardless of how well you negotiate, it is not likely that the result will be a truly market competitive agreement. However, sometimes this is an acceptable conclusion if you can maintain a strong relationship with your provider.
Rebid
If neither renewing nor renegotiating your outsourcing contract is a viable option, rebidding may be the best alternative. This does not mean eliminating your current provider from consideration, it only means that you will be entering into a competitive procurement and will seriously consider offers from other providers.
The rebid process starts in a similar manner to renegotiations by evaluating the results from your market assessment. It requires that you develop a legal agreement covering legal and business terms, pricing and service level agreements as you would if conducting a renegotiation. However, a rebid does require additional effort that starts with the development of a Request for Proposal (RFP) that would include RFP instructions, your legal agreement, and certain information regarding your IT operations.
The RFP process begins with the selecting potential bidders to participate in the proposal process, conducting a due diligence process to allow bidders access to information to complete their proposal, reference checks, site visits and evaluation of provider proposals. The final provider selection process considers all the information gained during the RFP process and results in the selection of typically one or two providers. The negotiation process can then commence with one provider with one as a backup or two providers simultaneously. A well run process can, and usually does, result in considerable savings for the customer and an agreement that is fair to both the customer and the provider.
In conclusion, the end of an outsourcing agreement provides the opportunity to strengthen the relationship with your current provider or building a more productive relationship with a new provider; both at a lower cost and higher quality than what you are currently experiencing.
However, you must decide upfront that your objective is to improve your outsourcing provider environment and then go through the right process to achieve your goals whether that is to renew, renegotiate or rebid.
More information on this topic can be found on Outsourcing Leadership under the title, Outsourcing Contracts: Renew, Renogotiate or Rebid?
Visit http://www.outsourcingleadership.com/ for additional information on best practices in outsourcing, shared services, benchmarking, and assistance with your sourcing strategies.
About Alsbridge
Alsbridge, Inc. is an award-winning global advisory firm and a distinguished member of the 2010 Inc. 500 fastest growing privately held companies. Alsbridge redefines the way companies reduce costs and improve back office operations. Our proprietary benchmarking tools and data resources enable clients to utilize the most cost effective and value added sources globally for information technology, business processes and telecommunications networks. Through a combination of internal optimization and outsourcing, our clients achieve cost savings that support their strategic business objectives.
Founded in 2003, Alsbridge is the proven, effective difference. The company's web site is: www.alsbridge.com. |
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