Renewing your Outsourcing Agreement - Ensuring the Benefits are Shared

Jim Black, Vice-President IT Operations at MDS Inc., posted a discussion question on the Outsourcing Relationship Management Group of LinkedIn. Jim asked how one ensures the benefits of sole sourcing are realized by both customers and service providers. (Here is a link to the discussion: http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=20146940&gid=2437594&trk=EML_anet_qa_ttle-dnhOon0JumNFomgJt7dBpSBA.)

Jim asked the question generally, so that it related to both new outsourcing deals and the renewal of an existing outsourcing relationship. I thought about the question more narrowly however, in the context of the renewal of an existing outsourcing relationship: how do customers who are thinking about renewing their outsourcing relationship with their current service provider ensure that the benefits of the renewal are enjoyed by both parties, not just the service provider. I replied to Jim on this question and wanted to share my thoughts here.

There are three general areas to think about.

First, customers need to determine what their objectives are for the renegotiation. In the same manner as customers will define their objectives in entering into an outsourcing arrangement, they should try to define what they hope to achieve from the renegotiation. Certainly there will be a cost component to the objectives but it will probably include more than that. It may include “fixing” some irritants or problem areas in the outsourcing relationship, implementing new technology, improving service levels and so on. Also in this category of thinking about objectives, it is worthwhile to try to determine what objectives the current service provider will have for the renegotiation. Knowing this may allow the customer to define aspects of the process or make compromises in areas that are important to the service provider but of little cost to the customer.

The second aspect of a renegotiation is to obtain some market data with respect to price, service levels, terms and conditions, etc. This information can be obtained from speaking with other companies, consulting with benchmarking organizations such as Gartner or exercising benchmarking, audit or other rights that exist under the current outsourcing agreement. Your legal counsel may have information about market terms and conditions. If you are using a third party intermediary such as TPI or Everest, in all likelihood they will also have market data that they are able to bring to bear. While there are a variety of sources, the important point is to obtain some sort of information. You will need the leverage.

The third aspect is to define an effective process for obtaining a realistic proposal from the existing service provider. What I have seen done in other circumstances is for the customer to establish a separate process with the existing service provider under which:

(i) the customer establishes some objectives that any renewal proposal must satisfy and communicates these objectives to the existing service provider;

(ii) the existing service provider is invited to make a sole source proposal – in effect a BAFO – around the renewal – the proposal must be responsive to the customer’s requirements, identify the benefits to the customer of accepting the proposal rather than issuing an RFP, providence evidence that the proposal is market, etc.;

(iii) the proposal of the existing service provider must be submitted on the basis that, if it is acceptable, the customer will attempt to negotiate a contract extension with the existing service provider. If the proposal is unacceptable or if the customer and the existing service provider are not able to reach agreement on the contract extension, then the customer will initiate an RFP process. The existing service provider will not be entitled to participate in the RFP process.

The customer needs to ensure that it starts this process significantly in advance of the expiration of the existing outsourcing agreement because this process can take some time. The customer does not want to be squeezed if there is not sufficient time. Therefore, if there is not enough time, the customer may be best to negotiate a short extension to the existing outsourcing agreement on the same terms and conditions so it has time to follow this process.