A natural consequence of a maturing outsourcing market is the growing number of contracts that need to be renewed, restructured or renegotiated. In fact, the latest ISG Outsourcing Index® shows the number of outsourcing contract restructurings in the first quarter of 2016 set an all-time record, jumping nearly 50 percent since the first quarter of last year.
Meanwhile, the percentage of incumbent IT services providers that retain the business at the time of renegotiation is falling, and falling fast. This trend is due in part to the changes in the market—the insatiable demand for digital, the need to capitalize on the latest emerging technologies and the desire for alternative service delivery models—in short, the need for speed, flexibility, creativity and agility. This trend is also due to the plain fact that clients often find it difficult to strike a deal with an incumbent that gives them increased capability at a competitive price.
Here are the Top 5 important points to keep in mind when you consider restructuring with your incumbent service provider:
1. Insist on a fresh pursuit team. The incumbent’s current account manager plays a role that requires account-management skills, so he or she should not be the one negotiating the new deal. Look for a team made up of new resources that can offer the latest portfolio or technological solutions to move your organization forward. Make sure you communicate the fact that you have defined the restructuring process as an opportunity for change and growth.
2. Don’t try to avoid transition. A shorter or less expensive transition from the current state to the future state can be appropriate at times, but when a service provider claims the deal will keep you from the pain of transition, it may mean the future state will be no better than the current one.
3. Lay all the cards on the table. If the relationship was in good shape—or even better, exceeding your expectations—a restructuring would not be required. Don’t let your service provider pretend nothing is wrong. Have them instead focus on transformation. Let them know you are well aware of the problems with the current state and you expect them to be fixed.
4. Don’t compare pricing to the current state. Instead, wipe the slate clean. Consider pricing as if you were going out to the competitive market in a declining cost industry. If you aren’t sure what service levels or pricing should be, conduct a benchmark study to find out.
5. Make sure you get the kind of pursuit team that works for you. There are times when members of the service provider pursuit team see it as their job to take positions on terms and conditions that end up being worse for you than the original deal. Instead, you’ll want to make sure the provider team includes these roles:
- Sales Executive is the first point of contact for the relationship and is accountable for financial approval with the provider.
- Engineering & Delivery teams are made up of solution architects (both enterprise-wide and tower-specific) and will design your solution (technology, team, cost and transformation). The Enterprise Solution Architect is accountable for continuity between all the in-scope components of the solution; Tower-specific Solution Architect(s) are accountable for individual solutions that fit within the larger context.
- Finance Lead prices rack units and is responsible for overall deal financials.
- Transition Leader plans the transition and is the go-to person for ensuring the deal accounts for the cost and the approach.
- Transformation Leader plans the transformation and ensures the deal accounts for the cost and the approach.
- Bid Manager runs the pursuit all the way from orchestrating the meetings to managing documentation.
- Due Diligence Lead orchestrates the presentation of services for your due diligence and coordinates the inquiries from the service provider for their due diligence of your environment.
- Legal manages negotiation and serves as a legal consultant for the pursuit team.
Restructuring a deal with an incumbent does not have to mean sacrificing innovation or market pricing. ISG works with enterprises around the world to help them make the most of restructurings and renegotiations. Contact me to discuss further.
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About the author
Lois Coatney helps large global companies prepare for operating in multi-sourced and rapidly changing environments; enabling clients to successfully incorporate new digital services and accommodate the need for agile operations. She brings innovative and industry-leading practices to transform service delivery into highly flexible service integration models; through the use of operating model strategies, readiness assessments, organizational and process design, and organizational change management. Lois has consulted with Fortune 500 clients across many geographies and industries to design and transform their service delivery operation, achieving the greatest amount of value from their services.