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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.

Review & Recover > Renegotiate

Re-negotiating an existing contract

If you are making use of BPO, it is almost certain that you will want to renegotiate at some point. The trigger will be a significant change:

  • The end of contract term approaching (the most common cause)
  • A large and extraordinary change in the your business that cannot be accommodated by the current contract, e.g. merger, change in business process, technology country coverage, major volume increase or decrease.
  • The service has not performed adequately and the solution requires contractual change.

This page reviews how you go about renegotiation successfully.

Preparation

If there is any one area for which I would emphasise preparation, then re-negotiation (and negotiation) is it.

Mobilise a strong team. This can be considered in three components: the negotiators - people who will be in the negotiation room, the negotiation team back office - preparing and reviewing, and the steering committee. The roles required are:

  • At the Negotiation Table:
    • Specialist negotiator
    • Client
    • Commercial/procurement
    • Outsourcing specialist
    • Legal
    These are roles rather than individuals. It is best to have at most 2 or 3 people representing you at the negotiating table covering multiple roles and augmented by specialists in the back office.
  • Negotiations back office (roles to support the negotiators):
    • Service scope subject matter experts
    • Financial analyst
    • Legal support
    Again, the numbers should be kept as small as allowed by the work, to make confidentiality easier.
  • Steering Committee
    • Executive decision maker: breaks any deadlocks and has authority to make commitments.
    • Stakeholder representation; both for the users of the service and functional as required.
    • Subject Matter Experts for service components: to cover specialist areas where there is expected to be negotiation.
    • Outsourcing expert
    • Legal (often outside council)
    The key questions for steering committee participation is who do you need to ensure decisions are final and who do you need to have discussions that are informed and balanced.

Thoroughly review and analyse the service past, current and future from the perspective of your organisation, the service provider and the service market place, including:

  • The organisation's requirements:
    • What are the organisation's current and future business requirements?
    • Has your organisation's strategy altered what you would ask from a service provider today?
  • The market in this type of service:
    • What performance are organisations with similar needs experiencing - either with or without outsourcing?
    • What current and emerging market practices affect the contract's services, and how effective is the current contract at adapting to them?
    • What are current market practices in service levels, deal scope and other operating elements? How have they evolved since your deal was agreed?
    • What is the current market pricing, is there a trend, and how does the current contract pricing diverge from that model?
  • The service performance to date:
    • How does the current contract meet the organisation's requirements?
    • How has the service provider performed relative to service level agreements and other obligations to this point?
  • The status and direction of the service provider:
    • How has the service provider itself changed since the original contract was written?
    • What are the service provider's needs, and is the contract meeting them? What might they be looking for in a new deal?
    • Do any changes to the service provider offer insight into possible bargaining positions - for example have they lost a big contract or opened a new offshore centre?
  • The alternatives to reaching an agreement with the service provider:
    • What are the exit provisions in the current contract, and how can they be used if an agreement cannot be reached?
    • Are there other service providers that would be able to satisfy your requirements and how long would it take to transfer?
    • How costly and how much time would it take to bring the service in-house?

Develop your negotiation strategy, including:

  • The overarching goals for the renegotiation; not just short term, but also for the relationship in the longer term.
  • A list of requirements: force the requirements into order of priority; define the requirements as a range and be clear and realistic about would be a target level, what would be acceptable and what a real walk-away.
  • A list of positions in the current contract that could be relaxed with little value loss if useful in reaching agreement.
  • Identifying your next best alternative to reaching agreement.

Prepare your wider community: your organisation will be interacting with the service provider on current business during the negotiations. Think about how you would like your colleagues to react to any comments or questions from the service provider. How will your organisation respond to any rumours from the process?

The negotiating table

Principles for Successful renegotiations:

  1. Be proactive and prepare well.
  2. Define your objectives and positions: Do force yourself to clarify your objectives and your negotiation positions in a single document that can be validated with your steering committee and used as a guide through the discussions. Done forget to look at the changes you want to improve governance as well as in the core service.
  3. Mobilise the right expertise and authority in the negotiating team and steering committee.
  4. Clarify the decision process for agreeing any accommodations or new proposals. There is nothing worse than a negotiator having to change position mid discussions and unnecessary delays cause frustration.
  5. Do engage your wider group of stakeholders, those that may interact with the service provider during negotiations, in order that they understand what is going on, know how to deal with any questions and are supportive.
  6. Have the objective of reaching a mutually beneficial outcome, and adopt a positive attitude with your service provider. The renegotiation may be unwelcome and the cause not of the service providers doing, but it should be, and be presented, as a positive opportunity.
  7. Set the standard of conduct during negotiation as you would expect it to be throughout the service term especially for dealing with issues. Negotiations should be fact based, with give and take, integrity and respect.
  8. Allow plenty of time. Deadlines are a severe liability to reaching a successful result.


Setting up

At some point, you need to establish with your service provider that you wish to enter renegotiations. Whether this comes as a surprise or not, it is better to make to make a clear and official announcement. This point provides the opportunity to start the process off in the right direction:

  • Be very clear about your business intentions.
  • It may be useful at this point convince your service provider that it is also in their best interest, some arguments being:
    • It is better to renegotiate than be facing termination or competing with other providers.
    • It is an opportunity to extend the term of the contract and gain a longer term revenue commitment.
    • There may be opportunity to review potential for additional scope.
    • It will be possible to resolve aspects of the agreement that are out of line with the service provider's current practices.
  • Agree the process and rules of engagement, which should:
    • Allow both parties to explore options and understand the others' points of view.
    • Make time to test compromise positions with steering groups.
    • Support decision making and reaching agreements.
  • Establish a set of data about the agreement and service shared with and agreed by the service provider - a base of agreement. Include volumes, pricing, service performance, both the history and expectations for the future.

Establishing an opening position

Since it is likely that you wish to make a number of changes to the current contract, do set out your proposal covering all your requirements. Connect to the current agreement in overview mentioning important aspects you will want to retain and be very specific on the new points. Your negotiator will have views on where to pitch an opening position, but do make sure it is based on the facts and is respectful.

Managing the negotiation

During the negotiation, you are likely to cover a wide range of points. The challenge is to reach agreement on each separate point, with appropriate trade-offs, when the nothing is agreed until everything is agreed. The process is generally one of working through all points, understanding respective wants and needs, coming to agreement where possible and progressing to a position where only a small number of points remain open for the final deal.

Remember while negotiating:

  • Have a mechanism to keep track of all the areas discussed. While you will have your own notes, you also need a shared document with the key points and the respective positions.
  • Remember to keep your Steering Committee informed to avoid having nay commitments you have made during negotiations rejected by your steering committee, or, nearly as bad, accepted only because you have already made a commitment.
  • Do take a break when energy runs out and progress slows. Negotiations always take time.
  • Listening and advocacy skills are critical. It is all too easy to agree on words and have a different understanding of what was agreed.