Many companies with outsourced operations are reasonably well satisfied. However, as many as one-fifth are dissatisfied, and others are not entirely satisfied. Nonetheless, incumbents are rarely displaced (with some notable exceptions). Why is this so?
Often, presumably, incumbents perform satisfactorily, and there is much wisdom in the maxim “if it isn’t broken, don’t fix it.” Incumbents enjoy huge practical advantages over any competitor, including inertia and intimate knowledge of the customer’s business. Changing suppliers, moreover, is often complicated, disruptive and costly. Small wonder that even dissatisfied customers may prefer, or at least settle for, “the devil they know.”
Faced with these realities, what can a customer do to improve its position when contracts lapse? Skilled negotiators know the importance of having an alternative. Otherwise, one becomes a captive, dependent upon the other side’s goodwill and willingness to make unilateral concessions. The crucial thing, therefore, is to create bargaining leverage in the form of credible alternatives, without damaging existing relationships that, in the end, are likely to survive.
Read the Contract
Surprisingly few customers actually do this. Rather, they put the document in a drawer and leave it there – unread and unused. This is a pity, since many contracts contain provisions that anticipate expiration or re-negotiation, and provide leverage when those opportunities appear. Common provisions include:
- Benchmarking. Nothing is better calculated to stimulate discussion than a credible, independent determination that charges exceed current market rates. Some contracts oblige the supplier to match the market, or at least risk termination or other consequences if they fail to do so. Even when the supplier has no obligation to do more than discuss the report, findings tend to take on a life of their own. The supplier whose prices exceed market knows perfectly well that it must take action to retain confidence and goodwill, especially if it hopes for renewal, additional scope, and/or approval of any new proposals. The unfavorable findings become the proverbial elephant in the room. Something has to be done.
- Convenience Termination. Most contracts permit the customer to terminate some or all services at will, without cause, by giving required notice and paying an agreed termination charge. If termination charges are comparatively modest, it becomes self-evident that the customer has options other than staying put and living with the incumbent’s current contract. For the customer, there are few better backdrops for re-negotiation than a credible, relatively inexpensive option to terminate the existing contract. (“If we are unable to reach agreement upon revised terms, then . . .”)
- Scope Reductions. These days, few contracts are exclusive, and most allow the customer considerable latitude to take back work or send it elsewhere. If the incumbent’s service or charges are not entirely to the customer’s liking, there are few clearer smoke-signals than trimming the incumbent’s scope.
- Governance. Large-scale outsourcing contracts often include elaborate governance provisions, yet just as often they are completely neglected. Executives for outsourcing suppliers are very sensitive to sales, backlogs and renewals. Where fundamental issues exist concerning renewal, charges, scope, performance standards and the like, there are few better audiences than the executives to whom the supplier’s account team reports.
Plan Ahead
All contracts will expire. Looming expiration dates concentrate supplier minds upon prospects for renewal. However, timing is everything. The customer should begin exploring those alternatives a year or more before the contract calls for notice of future intentions. The customer who waits too long may have no real alternative to renewing its existing contract on the supplier’s terms.
Conduct an Assessment
Review of the customer’s position and options must, of course, extend beyond the contract text to consider current and anticipated needs, costs and performance. The questions are numerous, and for the most part, obvious. How do costs, solutions, service levels and contract terms compare with the current marketplace? Has the customer received value for money? What claims might the parties assert against one another? What would it cost to terminate? What other service opportunities might be offered to the supplier? What are the service provider’s goals and desires? What performance, financial or other issues are outstanding? From this process will emerge, among other things, an agenda for discussion. This assessment should be discreet, but not secret.1 Engaging outside consultants or counsel to assist with this process is a sure signal that the customer is serious.
Talk to the Competition
In fact, do more than talk – award them some business. One cannot sustain a competitor’s interest without a fair shot at new business, and at least occasional success. Having other regular suppliers can help to deter complacency and keep the primary supplier “hungry,” motivated and, above all, competitive. Monopoly is a delightful table game, but a poor strategy.
Play It Straight
In order to preserve good business relationships with incumbents, customers should be straightforward about their intentions. An incumbent may not like, but will understand, (and should respect) a policy of avoiding dependency and assuring competitive terms through reliance upon multiple sources. Generally, it is far better for incumbents to hear this directly than leave them to divine intentions from whatever sources they may have within the organization. Remember that bluffs, once exposed, are counter-productive.
Starting the Dance
The customer may issue a request for proposals (“RFP”) and conduct formal competition. Sometimes, however, the customer can achieve approximately the same result more quickly by suggesting to the incumbent a serious discussion that of revised terms before the customer has to consider issuing a termination notice or RFP. (“Before we take this to the street, we would like to give you an opportunity . . . .”) Rather than simply invite the supplier’s proposal, it is often best for the customer to propose specific terms that reflect current market trends. Faced with the prospect of heavy bid, proposal and other expenses, as well as the risk of losing the business, most suppliers will engage in serious negotiations without the customer having actually to proceed to formal competition.
Here again, for the customer seeking better terms, the essential thing is to find or develop, and then exercise, leverage, and do so in a straightforward manner that may not only improve the terms, but strengthen the business relationship.
About Baker & McKenzie
Baker & McKenzie’s more than 3,000 lawyers serve clients worldwide from 70 offices in 38 countries. George Kimball is a partner in Baker & McKenzie, and a member of the firm's worldwide outsourcing practice. He has for many years advised both suppliers and customers in the negotiation and renegotiation of IT and business process outsourcing contracts in a variety of industries.
George.Kimball@bakernet.com.
