The outsourcing of complex support functions – IT, Finance, HR and others – has really taken off over the last 10 years, and has rocketed over the last 5 years. The result is that the initial terms of many of these contracts, which were typically between 5 and 10 years, are reaching expiry. And as a result, more and more organizations have to decide what to do: renew, renegotiate, change provider(s) or bring in-house, or some combination of the above.
To make the right decision, organizations need to get the basic foundations right.
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Allow Plenty Of Time
The key to success is having a range of realistic options. Working against a tight deadline is likely to reduce the options, and will strengthen the relative position of the incumbent. Recognize that negotiations typically need months, not weeks, to complete. And that transitioning a complex function out of an existing arrangement is also likely to take months. Even if the intention is to renew with the existing provider, assuming that some re-negotiation is required this process needs to start with well over a year to go before expiry of term – anything less and there is no realistic alternative.
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Understand How The Market Has Changed
A lot happens in 5 years, even more in 10. Technology and business process improvements have been developed, offshore delivery has become commonplace, new entrants have introduced competition and commoditization and not to mention how your organization itself, and its markets, competitors and business environment will have also changed.
All of this needs to be taken into account in determining the way forward. How likely is it that the services contracted for, or the terms and conditions, or indeed the supplier itself, will still be the best ones 5 or 10 years after they were first agreed to?
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Be (Relatively) Open With the Incumbent
Changing providers or coming back in-house is always going to be expensive and operationally complex. This doesn’t mean that these options shouldn’t be considered or that it couldn’t be done, but unless the relationship with the incumbent has really broken down, or there are other fundamental reasons why they are no longer suitable partners, then it makes sense to define what you want to achieve, and then review with the incumbent whether you can achieve that with them. Of course, to understand what your options are, you will need to understand what is available in the market (through consultants, analysts, and market-testing) but openness with the incumbent allows you to understand your existing position better. Remember that even if the plan is to move the services, the incumbent’s co-operation will always be needed. Open communication may be counter-intuitive in a negotiation, but it can be a strong point, surfacing issues and options.
Clearly however, as in all negotiations there is no need to reveal your whole hand. And beware the incumbent who advises you not test the market – a strong and confident incumbent should have so many inherent advantages (deeper relationships, better knowledge, less change-related disruption) that they should not fear you making a fully informed decision.
Once these basic foundations are in place – plenty of time, market knowledge, clear communication with the incumbent – then you need, as ever, to properly prepare and plan: establish a dedicated team, baseline existing services, project future requirements, engage with the market, prepare your negotiating strategy, among other things. The truth is that there is almost as much work to be done at the end of a contract as there was at the beginning. |
