I’m going to tell you something shocking…people won’t always be happy with their contracts. Speechless? I know, it caught me by surprise, too! Sometimes this happens in the outsourcing industry as well, and contracts need to be renegotiated to keep everybody happy. Below is a condensed version of an article by Caroline Doherty de Novoa that explains renegotiating outsourcing contracts.
How To Successfully Renegotiate Outsourcing Contracts
The transition from one year to the next is a good time for companies to ask themselves whether their outsourcing relationships remain fit for purpose and whether they are getting the best value for money from their suppliers. If the answers to these questions are negative, then perhaps it is time to renegotiate the contract.
Reasons to renegotiate
Parties will usually renegotiate coming up to contract expiry. However, there are various reasons why a customer might want to renegotiate mid-term as well. These include:
- Dissatisfaction with the service provided
- Technology issues
- Poor relationship management
- Financial reasons
- Business change
Some of the issues can be dealt with through the contract’s change governance procedures, but others may be so broad that it is better to renegotiate the agreement than get caught up in an endless cycle of piecemeal adjustments. Obviously, if the issues are chronic, then the customer should be looking at its termination options and its replacement/step in rights rather than renegotiating.
When considering its motivations for renegotiating the contract, the customer should be careful to look at the whole picture. If a customer understands the root cause or causes underlying its desire to renegotiate, then it will be better positioned to address them through the renegotiation process.
A renegotiation provides an opportunity to reset the relationship and get it back on track if it has wandered off course. It is not about tearing up the original agreement and starting from scratch, it is about taking the lessons learned from the early years of the relationship and making improvements.
In some cases, a customer will have an automatic right to renegotiate built into the terms of the original agreement. However, even if no such right arises, the customer is still entitled to ask the supplier to renegotiate. The supplier may refuse, but often it will say yes. The supplier may be content to reconsider its position in light of market forces or business changes, or the supplier may want to negotiate out or modify some obligations that have proved overly onerous in practice. The supplier might also see the renegotiation as an opportunity to sell the customer new or additional services. Finally, the supplier may be prepared to renegotiate simply because an outright refusal would lead to tension and might damage the relationship in the long term.
Whatever the supplier’s reason for agreeing to renegotiate, the customer would be well advised to remember that both parties will be coming to the table expecting to improve their position in some way. Approaching the discussions with the attitude that “you give and I take,” is the fastest way to deadlock.
Choosing the team
When forming its renegotiating team, the customer might want to consider retaining an outsourcing advisory firm. They can advise on market pricing and standard commercial terms. Likewise, external legal counsel can advise on the nuances of the contract language and give an overview of what is standard across the industry. However, external advisors should only compliment and support the customer’s internal team. They should not replace them.
The customer’s employees have lived and breathed this contract since its inception and will better understand the customer’s needs than any external advisor. An external lawyer or consultant can make recommendations, but it is for the customer to decide what points to push and what to concede.
When the customer’s procurement department is leading the renegotiations, they must seek out the input and support of all key internal stakeholders. The renegotiating team should have senior management buy in at the outset so they understand the parameters of their authority. There is nothing worse that spending days or weeks hammering out a handshake agreement with the supplier only for the renegotiating team to find that it cannot sell the deal internally. Not only is it a waste of everyone’s time, but it can also give the supplier the impression that the customer is not negotiating in good faith. After all, this is supposed to be a mutually beneficial relationship, one that requires a degree of trust.
The renegotiating team should also consult with the people “at the coalface” – i.e. those individuals that deal with the supplier on a regular basis. They understand how the relationship works in practice and what needs improving.
Preparing for a renegotiation
Once the negotiating team is formed, there are various steps that they should take before even sitting down with the supplier. These include:
- Speaking to senior management to understand the customer’s overall objectives for the relationship, both in the near and long term.
- Critically assessing the existing arrangement against these objectives. It is important to understand what is working well just as much as what needs clarified, amended or scrapped. Otherwise, there is a risk of throwing the baby out with the bathwater.
- Carrying out research on pricing, prevailing market conditions and best practices.
- Creating a position statement and setting priorities. Setting an internal position statement that sorts the “must haves” from the “nice to haves” will keep the renegotiating team focused on the issues that really matter.
- Brainstorming from the supplier’s point of view.
Conducting a renegotiation.
After the internal preparations are complete, the customer should sit down with the supplier and agree a timeline and framework for the renegotiations. A renegotiation should be a focused and, if possible, time-bound activity. Allowing renegotiations to drag on distracts everyone from their main jobs and could negatively impact the relationship.
There are many negotiating tactics, and entire books have been dedicated to this subject. However, one of the most effective tactics is to have an open, constructive and fact-based dialogue. If the customer is well prepared, comes to the table with persuasive evidence on pricing and industry standards, and is willing to make some concessions, it will probably not need to resort to dramatic negotiating tricks.
That being said, a sensible customer will shop around and investigate both viable economic activities and their termination rights should the renegotiations prove unsuccessful. Speaking to competitors not only provides a benchmark but also creates leverage, should it be needed.
The customer should also demand a similar openness and fact-based approach from the supplier. For example, the supplier should be asked to give a clear breakdown of its pricing so the customer can understand how much relates to services and how much to infrastructure. The customer does not want to be covering more than its fair share of the supplier’s infrastructure costs.
Done right, a renegotiation should be an opportunity to make a good relationship even better by leveraging the experience of the past to create a stronger relationship for the future.
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