The renewal of a major second generation outsourcing contract presents an interesting dilemma. Changing service providers, especially one that manages a large part of your operations, is never easy, even in the best of circumstances. The incumbency factor, shrinkage in your retained organization, the limited internal capability depth and the need to devote management bandwidth to a huge transition, all while keeping the lights on, would give pause to most organizations. If your incumbent has at least earned a “first right of refusal,” consider these Top 5 ideas:
1. Start early. Getting everything in place before contract expiry will increase your leverage to make meaningful structural changes to the contract. If the contract encompasses multiple countries or towers and invites regulatory scrutiny, be sure to build an empowered team of senior stakeholders from internal clients, operations and the finance and legal experts at least 18-24 months before contract expiry. This will keep your “go to market” option from being just a theoretical possibility.
2. Avoid an exclusive focus on price. The outsourcing landscape has changed tremendously since your first-generation outsourcing deal. Take time to understand the current industry practices, service-level expectations, technology platforms, pricing mechanisms, productivity trends and contractual vehicles available in the market, and prepare a goal sheet of what matters to you. Focus on getting buy-in from the incumbent on your priorities, and only then focus on price. Locking in a savings target first will impede progress on other aspects of your contract and risk huge value leakage.
3. Re-examine your sourcing construct. While it is a common belief that your service provider has greater leverage in buying products like hardware, software licenses, datacenter space and telecom capacity, there may also be significant local market variations. If the potential savings are great and such costs are largely “pass-through” in nature for your service provider, consider going direct.
4. Issue an RFP. Even if it seems counterintuitive in a sole-source conversation, issuing an RFP is a cathartic process. It will nudge your teams to document what is truly important to them and pinpoint areas for innovation or capability gaps. A proven, lightweight RFP process framework can bring improved pricing, change management and governance mechanisms.
5. Help your account executive. If your contract is in the US$100 million+ range, an incumbent would need to chase four to five deals of similar size just to make up for revenue loss from your account. Combine that with productivity benefits that may not have been fully passed to you and a desire to keep competition out, and you are looking at significant investment dollars that your account executive can “fight” for within their organization. Then take a collaborative approach to the negotiations so you can help him or her sell the deal to their management.
A major outsourcing contract renewal has the potential to be a catalyst for transformational change within your organization as well as in resetting the paradigm of your relationship with your service provider. To discuss outsourcing contract renewal further, contact me.