Subscribe    |    Sponsors    |    About Us   |   Contact Us                

Journal Home
BPO Journal
Current Issue
Back Issues

Table of Contents

Insights
Restructuring: Outsourcing's Version of Death and Taxes

Customer Voice
Man With a Mission

Supplier Voice
The Expectation of Renegotiation

Analyst Voice
The Little Things That Count

BPO Voice
Successful BPO Contract Renegotiation

Legal Voice
The Many Sides of a Re-Do

Academic Voice
Lateral Leadership For Organizations That Are Outsourcing

The rapidly maturing and changing world of outsourcing has created one sometimes painful truth: like death and taxes, the renegotiation and/or restructuring of longer relationships is almost inevitable. While these events must be faced by many customers and vendors, some of them can be avoided and others can be transacted more smoothly if the customer is armed with a better understanding of the outsourcing environment.

First, let's take a look at the reasons for renegotiation and restructuring. Some are bad deals from the beginning. The customer buys on price alone, without adequate consideration of the performance promised. The vendor has based that price on a series of assumptions that the customer later discovers he doesn't share. He is, in fact, buying something other than he expected. These situations occur everyday, despite the detailed proposals involved in the initial negotiations. While price certainly is important, using it as the primary motivation in choosing a vendor is setting the stage for painful renegotiations in the future.

These renegotiations can be avoided with proper due diligence in the initial negotiations, but others involving technology and the customer's changing business requirements cannot. Look at what's happening in technology, particularly in IT where the underpinning technology is going through dramatic evolution. Desktop technology, for example, is on a very fast pace. Desktop services considered cutting edge three years ago are no longer thought to be even adequate today. Long-term contracts for desktop services have to be renegotiated quite often, because what the customer is buying changes so dramatically.

Telecommunications is another example. Two or three years ago, no one dreamed the implications the internet would have on that industry. We still really don't know the direction that the internet will take us. A long-term outsourcing deal in the telecommunications arena is bound to be renegotiated because of the core shift in technologies and the marketplace.

The last trigger for renegotiations is change in the business requirements of the customer. A company can change significantly over a three or four-year period. It can grow or shrink or head in new directions. That means the long-term relationship created to take care of business needs in the past no longer meets the needs of today. Change is inevitable in a long-term deal. How you, as a customer, prepare for and deal with that change can have a great impact on your outsourcing relationship.

The easy answer is not to do deals that have long-term contracts in them. Instead, create a procurement system with a master contract that allows you to add service agreements, but limit the service agreements to two or three years in length. With that system, both parties know in advance that you're going to renegotiate the deals.

That sage advice for the future, however, doesn't help those of you already in relationships and facing renegotiation or restructuring. One thing that's about to happen is you're going to discover whether or not you have a vendor who is willing to operate as a partner. Vendors usually have an advantage in renegotiations, because most long-term deals include a significant penalty for termination for reasons of convenience. Historically, many vendors have chosen to exploit that advantage, and customers have suffered both on price and performance accountability. There are tools you can use to generate leverage, but be aware that they likely will generate bad will between you and your vendor, and conflict can end up hurting both parties.

What we at Everest have found to be helpful is to focus the discussion on what is causing the need to change. If your business is changing, focus on the business issues. If technology has changed, focus on the technology issues. If pricing has changed or you did a poor job of establishing pricing and performance in the beginning, speak to that issue directly. If you've just decided you're paying too much, you're in for an adversarial and potentially painful set of negotiations. Most outsourcers react badly to such situations, and their reaction is somewhat justified. They have built their business around a certain set of assumptions. Any changes can mean that they face the prospect of losing money by not gaining back the investment they've made in the deal. In the other situations -- changes in your business and evolving technology -- more opportunity for win-win is created, because you're dealing with real business issues, and people of good will can find ways to work through those.

As complex as the renegotiation issues may be, the basics of dealing with them are fairly simple. Be careful going into the contract to understand exactly what you're getting for the price you're paying. Try to do shorter deals, rather than longer ones. If you must renegotiate an existing contract, focus on the business issues first and try to make the vendor understand why you have to make the change, rather than couching the discussion in complaints of price and service levels. Finally, try to understand the impact of the proposed changes on the vendor.

While renegotiation and restructuring are inevitable in long-term deals, those events don't have to be relationship killers. They can, instead, result in true partnerships that serve the needs of both parties.

Publish Date: July 1998

Copyright © 1998 - Everest Partners, L.P.

[Previous Story] [Next Story]

SPONSORS

ADS