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Outsourcing Fundamentals

Independent guide to Outsourcing: BPO strategy, Service Provider selection, contracting and implementation projects. Assessing and improving your current service.

Contract End > Renewal

Managing the renewal of your services

In this page, I describe some of the challenges specific to renewing services at the end of a contract. This is a continuation of the page "Contract End > Preparation". It assumes that you have carried out the sort of analysis described there and decided on your approach. I have not covered renewal activities in detail since that would overlap with other pages. I do refer to the relevant sections and pages. Also, I have not described how you would set up an internal organisation for bringing services back in-house.

Change Management

For each of the options described, please do not neglect change management, starting with ensuring that your senior stakeholders are well informed and supportive. Change management is covered in "Implementation > Change Management".

Contract Extension

In the vast majority of cases, there will be changes to be made to the services and one or other of the parties will want to adjust pricing. Both client and provider may agree to keep the majority of contract terms the same, but that is not always the case. For example, the contract may not have required your provider to keep process documentation sufficiently up to date and available to you; or you may want to clean up 'exit' or perhaps 'audit' provisions.

So the essential core of extending a contract is renegotiation. I have covered the renegotiation process in the page "Renew & Recover > Renegotiate", but I will emphasize some specific points here.

Contract extension is a sole source negotiation with a familiar company, an organisation you have been working with for years. However, the provider will be very aware, from its other business, what the market rates for its services are. And, because this is very definitely its core business, will need to achieve the best return possible without upsetting customers. The key to success will be:

  • Set out your requirements clearly.
  • Obtain information on market pricing.
  • Negotiate fairly and firmly.

It is useful to understand that there is significant advantage to both parties to come to an agreement.

The client will still benefit if prices increase due to avoiding:

  • the cost of going to market
  • the cost of transaction and contracting
  • the cost of transition
  • potential performance dips
  • risk of new relationship

The provider will be better off at rates lower than in the initial contract due to avoiding:

  • cost of sales
  • cost of solution development & transition
  • risk of under-estimating the proposal

Going back to the market

Most of the actions and considerations of returning to the market to select a provider is the same as going for the first time. Please make use of the section "Contracting". Here, I will address some of the differences of going through the process while already having an existing service.

The Incumbent

Of course, the legacy services need to continue to perform while the renewal takes place and managing the incumbent provider cannot be neglected.

Whether to have an incumbent provider included in the short list of candidates is an interesting question. If you exclude the incumbent, you may be excluding the most suitable provider. If the incumbent is included, other providers can worry that the decision is already made; that the process and their involvement is simply to provide competitive challenge to the incumbent's pricing. Perversely, incumbents may worry that they have already been rejected and are being kept on the list simply to placate them during the process.

In this sort of situation, my guidance has been:

  • If the incumbent has no real chance of winning, regardless of the reason, do not include them on the candidate list. Inform them of the process and do your best to maintain a good relationship.
  • Do include the incumbent on the candidate list if they deserve to be there. If the odds of their winning are slim, then do explain that and tell them what they will need to do to win.
  • In talking to candidate providers, acknowledge that an incumbent has advantages, and take actions to make the competition fair, such as providing as much information as possible to new providers, or giving new providers access to company leadership.

The objective, just as for a first contracting process, is to have a fair process that results in the best service and provider for your company.

Service Delivery Model

Do remember that the first time a service is outsourced, the provider is likely to have had a significant part in shaping the service delivery model. The second (and subsequent) time around, you are unlikely to want to offer as much flexibility. However, providers will need to make use of their proprietary work management and work centre processes and systems in order to be efficient and competitive. You may also want to introduce some changes to your requirements.

Requirements Information

Since you are replacing existing services, the core of the requirements will be the same. You may choose add or remove scope, but the description of the current services will provide most of the information required. The scope and the interfaces will be well defined.

From the existing services, you also have years of detailed volume history. You also have service levels and the performance history. The existence of this information will allow new providers to make commitments to service levels and to make proposals with less margin allowed for uncertainties.

The current service pricing also provides a much better base case against which to evaluate proposals

The Services Exit

In all good BPO agreements there will be a defined exit plan and a set of agreed exit services to support a successful managed transition. There will be some degree of complexity introduced because you need to have three companies aligning on a transition plan. In my experience providers are very professional about their exit, wanting to support their reputation and likelihood of winning further business.