Outsourcing: source of comfort

Outsourcing: source of comfort

Renegotiating your outsourcing deal may be a cheaper option than retendering the contract

As the global outsourcing market matures, we are seeing more and more
contracts being restructured before they reach their agreed term. So far in
2007, restructured deals account for almost a quarter of the total value of all
contracts signed in Europe.

Although restructuring can be caused by a breakdown in the relationship, the
majority of contracts are actually restructured simply because the buyer’s needs
have changed. This is particularly true of the finance and accounting (F&A)
sector, which is relatively new and constantly evolving.

The challenge for business is to manage the restructuring process so that it
gives you the improvements you want, without causing unnecessary friction.

Restructuring for a good deal

Buyers often feel they have less leverage during restructuring negotiations
than when they first signed the contract. This stands to reason: when the
contract is originally tendered, there is a level playing field between
competing suppliers who are eager to win your approval. But once a deal is
signed this competitive atmosphere is lost and the relationship dynamic shifts.

A number of tactics can help maintain a healthy power balance. F&A is one
of the fastest growing sectors of the outsourcing market; the total value of
contracts (for those over $25m) has increased 135% between 2003 and 2006, and
with this year’s figures looking promising.

But the flipside to this developing and increasingly competitive market is
that the price you initially agreed may no longer be competitive. You may also
not be taking advantage of the current shift towards transactional pricing,
where charges fluctuate along with volume of work outsourced at any one time.

Pricing arguments make a good cause for restructuring, and are hard for
suppliers to ignore if backed up by appropriate market research. But equally
relevant is additional and higher-value work. In the early days of F&A
outsourcing, most buyers outsourced only transaction-focused processes, focusing
on cost-saving rather than added business value.

Today, buyers are outsourcing more complex processes through ‘knowledge
process outsourcing’ (KPO). This frees up the inhouse team to concentrate on
more strategic areas of your business. It can also be more profitable for
suppliers, as it involves a greater level of expertise, and higher value work.
Discussions around a move into this area should therefore be mutually
beneficial, and will show that you are committed to moving the relationship

It is prudent to be aware of your exit options. But even if you are
encountering problems, resist the temptation to threaten your supplier with bad
publicity, as your own reputation may also be tarnished. Most importantly, never
indicate that you will terminate the contract unless you are genuinely in a
financial and strategic position to do so – it will only serve to damage the

The friction associated with a change of supplier can be considerable, whilst
new providers may prove reluctant to pitch if your current supplier is still in
the running, as you stand to lose more in terms of exit cost and knowledge loss
if you change suppliers.

First-time buyer?

New buyers can proactively improve their experience of outsourcing, and avoid
some of the problems associated with difficult renegotiations, by founding their
relationships on clear and comprehensive contracts that avoid ‘grey-areas’ of
interpretation and outline clear expectations on both sides. From day one it is
also essential to implement a continuous process of review and assessment based
on clear metrics and goals.

Allow adequate time within your organisation to define exactly what your
requirements are. Typically, personnel learn to devise business plans which
focus around the steps which must be taken in order to achieve success. But an
outsourcing plan is very different. Focus upon the what, rather than the how –
know what success will look like and then allow your supplier to devise a plan
for providing this.

An understanding of your own business is also vital as it will allow you to
find a supplier with the right culture to complement your firm. A provider with
‘cultural fit’ doesn’t necessarily mean one with the same business style as you.

So if, for example, you are looking to streamline processes and cut through
red tape, choose a provider who is happy to work to their own business model,
rather than one who seeks to mirror your inhouse practices.

Once a deal is signed, keep the relationship ‘live’. Our research suggests
that the majority of buyers (61%) felt that problems arose because they placed
more emphasis on setting up the contract than on managing it. Our experience
shows that without frequent and frank contact between buyer and supplier, a
divergence in expectations can soon arise.

This communication is particularly pertinent during the first, formative
months of a relationship, where the precedent will be set for its continuance.
Make sure that your team responsible for drawing up the agreement is fully
supported in ensuring it runs according to plan, rather than regarding it as a
‘done deal’.

Establish regular meetings between your inhouse team and their counterparts
within the supplier, where progress is discussed according to preset metrics.
These may include the financial savings you hoped to make, but should also focus
upon your wider business and strategy plans.

Ask yourself is outsourcing saving you as much time as you anticipated? Are
there further (or alternative) processes which could be outsourced? Which
elements of your supplier’s service are working best for you?

The contract should be regularly referred to, and any misunderstandings or
changing requirements dealt with as thoroughly as possible in order to avoid
further problems in the long run.

According to our observations, not only do three quarters of all buyers
typically remain with their incumbent after restructuring, but nearly half (46%)
of restructurings will lead to an increase in contract duration going forward –
and higher levels of satisfaction.

While restructuring is a necessary part of the outsourcing process, when
handled correctly it can also be an opportunity.

Elesh Khakhar is a partner at global outsourcing
advisory firm TPI

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