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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.

Contracting > Contract & Negotiate

Developing the contract and finalising negotiations

This is an overview of the contracting and negotiations. There are far more complexities and subtleties than can be covered here, but this should give you a good basis for discussion with your negotiation and legal team.

Negotiating the contract

For this stage, the dynamics change. Having been in open competition, you are moving to working with one preferred supplier, usually with a second provider advised that, while they have not won the selection process, their proposal was good and they would be contacted if negotiations with the preferred supplier did not go well. Some procurement departments like to hold negotiations with two providers in parallel on the basis that competition will give better positions. This takes a lot of extra resource and additional time and I generally recommend that it should be avoided.

The challenge of the Contract and Negotiation stage is to close the remaining gap between the service provider's committed proposals and your expectations, and capture the whole agreement in a contract. This will involve:

  • Taking out of scope any activities for which the proposal was not acceptable.
  • Resolve any remaining differences between the RFP and the provider's RFP response both for the service, and for the terms and conditions.
  • Transforming the service description and all the terms into the legal structure and language of a contract.

The work and difficulty in contract development and negotiation depends on how wide or narrow the gap between the parties prior to negotiation and the approach to negotiation adopted by each.

The contract structure: Your legal advisor will discuss and advise on contract structure. An example of structure is shown in the page "Contracting > key Documents".

The process

Negotiation preparations

  1. Internal strategy session: Brief the negotiation team on relationship strategy and agree how the negotiation style will be aligned.
  2. Identify the key constraints, for example:
    • Timing
    • Event driven (platform issues)
    • Fiscal calendar
    • Critical positions
    • Approvals
  3. Internal planning session: set roles, responsibilities, contract table of contents, detailed planning action plan, workshops for training of team members and setting of strategies. Work through the preparation check list in the box on the right. Have team agree style of negotiation.
  4. External planning session: meet with Provider to introduce teams, build relationships, define roles, lay out high level negotiations plan and short term action plan
  5. Assign responsibilities and set up document controls and logistics
  6. Start preparation of drafts (SOWs, SLAs, Transition, etc.) and refinement of the MSA

Contract Negotiations

  1. Daily sessions on various topics - some collaboration, some negotiation - with set agendas for the discussions
  2. Internal review sessions, draft turns, status meetings
  3. Parallel negotiation streams
  4. Close document for final review as they are agreed (SOW, SLA first if possible)

Sign off & Execution

  1. After all points have been agreed, one legal team assembles and conforms the full agreement and the other needs to conduct a full check.
  2. The documents need to go through the formal signing process, which is always convoluted.

Checklists

Preparation:

Scope segmentation: What are the blocks of scope being contracted for (and why)?

Contract Structure: How is the contract to be structured? Your legal team can design the contract ahead of time

Team preparation: Contract development needs a team with a range of skills. The team needs to be trained and the schedules allocated to team members. Good understanding and communication between legal, commercial and business specialists is critical.

Key Contract Terms: For the most important contractual terms (see page Contract Terms), what positions are already agreed? What are your objectives for open positions? Are there any absolute deal maker/breaker issues?

Pricing: Are the pricing objectives (structure) clear? What is the status of offers? Are the inflation and exchange assumptions explicit? Do you have comparison information: Current state baseline and your Business Case, Service Provider intelligence (not just pricing), Knowledge from other contracts? What are your goals for pricing levels? Is there a rationale for price reduction (why the provider should reduce)? What margin do you expect the Service Provider to make?

Invoicing / taxation arrangements: What are your requirements for invoicing to minimise impact of taxation and support company accounting? How should charges be split across countries and legal entities?

Financial Hurdles: Your Finance community stakeholders can kill a deal by increasing the hurdles or changing the assumptions. Document the financial assumptions that you are using and the hurdles that you need to hit for the deal to be acceptable and get them approved at the outset

Relationship objectives: Be explicit about the type of relationship you are targeting for the programme and operations. What behaviour during negotiations will support this and How will issues and negotiations blocks be dealt with?

Issue escalation: You will need to escalate critical issues that cannot be resolved by the negotiating teams. Keep the responsible executives out of the negotiation so that there is an escalation route close to the team. Ensure your senior executives are consistently well informed; suppliers will occasionally try to circumvent the designated negotiation team.

Challenges during negotiations:

Attitude changes after selection: When you select a provider, sometimes their attitude changes - they can be more confident of saying no, more formal in their approach. Work hard to keep a collaborative environment alive during negotiations

  • Have a joint working environment - co-located if possible
  • Talk openly about behaviour changes and your expectations
  • Tell each other if things are going wrong
  • Picking up the phone is normally better than sending attachment loaded e-mails; face to face conversations yield even better results

Provider using tough specialist negotiators: If the provider has put in people whose incentive is only to get best position for the provider, you need face strong negotiators with your own - typically people who will not be involved in service delivery

Provider building in assumptions:Your provider may develop a set of assumptions they feel they need to ensure their solution and price will be valid. Manage this tightly; Understand and query the assumptions - don't assume anything and minimise the incorporate of assumptions into the agreements. Know and assess the impact of assumptions and dependencies on your post contract business case.

Slow pricing turns: It can take 4-5 days or more for a provider to turn around a committed price - they will have a full approvals process to go through. You should avoid multiple re-pricing steps. Be very clear about requirements changes - and manage the audit trail

Pricing complexity: Detailed pricing terms can take a while to agree and they are interrelated to other parts of the contract so deal with the following in parallel with pricing - don't leave them until the end:

  • Pricing factors such as ARCs & RRCs
  • Dead bands
  • Rate cards
  • Treatment of currency and inflation