Cutting Outsourcing Costs; Is The Timing Right to Renegotiate?

By Allan Watton on

win-win contract negotiationYou’ve cut back and trimmed the fat, removed the less effective processes and people, and economised, as many sizeable organisations have had to do in recent years. But with more cost saving required in 2013 and all the ‘obvious’ opportunities exhausted, how will you meet this year’s targets?

The answer may well lie in your outsourcing costs, and those aspects of your agreements with service providers, seemingly ‘set in stone’, that no longer align to the needs of your organisation. In our experience, given the correct approach, most vendors and their contracts can be more adaptable than they might at first seem. Evidence suggests that the time is now better than ever to renegotiate your outsourced provider contracts.

The need for a contractual rethink
Most fixed outsourcing contracts were negotiated in better times, typically locking parties in for anywhere between five and 30 years. With the current economy forcing a significant shift in business priorities, what seemed like a great service delivery partnership at the time may now have become more of a financial burden.

In these tough economic times we have found that many organisations, both public and private, have moved away from the expectations of delivering ‘service excellence’ that were affordable in the wealthier days of yesteryear, to a maintenance of more realistic measures of ‘good enough’. For some time now, service levels have needed to walk a fine line between customer care and affordability. And for many organisations this has been the driving force behind their desire to renegotiate their service provider contracts.

Another factor is what happens when service providers do not provide the expected level of service. The widely publicised G4S security fiasco during the London Olympics last year, watched by the rest of the world, was an extreme embarrassment. The more recent electronic prisoner tagging overcharging scandal that still follows G4S and Serco is reported to have possibly been going on for years. And the chasm of difference between the promised service levels and actual delivery of Capita’s translation services to Her Majesty’s Courts & Tribunals Service has left confusion, delay and massive costs in its wake. These examples highlight the need to act quickly and decisively when things are going wrong in your contractual relationships.

Is it really possible to renegotiate a ‘fixed’ contract?
Put simply, the ‘fixed’ element of a fixed contract is only as immovable as the will of the parties involved. If both parties can appreciate the potential enhanced working relationship benefits that could come out of a contract renegotiation, then that’s a win-win for everyone. New service levels and deliverables can then be drawn up that more accurately reflect the needs of the organisation and the demands of the market.

I did say this was ‘put simply’ because in reality the priorities of the service provider and the customer being serviced may well be very different, but at least this gives us a starting point – the need to find common ground upon which to negotiate.

When is the right time to approach your outsourced service provider?
Last year Capita announced improved profits and this yearSerco followed suit . Through experience we have found that this significant growth in the outsourcing sector is the perfect time to enter discussions with your service provider to establish fairer terms.

The ongoing pressures on businesses of all sizes and from all sectors to cut their costs means that outsourced service providers are being approached on a regular basis by clients who either wish to make changes to their fixed contracts to better align them to current needs or simply cannot afford them any longer. If you do not react quickly you may get left behind, finding battle weary service providers less willing to discuss the contract negotiation points you were hoping to broach.

What’s stopping you from renegotiation?
Fear of change can be a paralysing factor in organisations. Many worry that to approach their outsourced service provider with discussions of contract renegotiations will be met with a wholly negative attitude that could lead to a lack of ongoing commitment or dedication from them –potentially undermining their relationships. But the reality is that this is now so commonplace that your service providers will almost expect an approach.

How to go about your renegotiation
The process of approaching your outsourced service provider to renegotiate your fixed contracts with them can be summed up in the three following steps:

  • STEP #1: Know your goals. To approach your service provider with woolly expectations is sure to cause friction. You need to go into negotiations with clear objectives for changes to services, costs and delivery methods. You may not have all of the answers, but you must know the right questions to ask and what you are looking to achieve.
  • STEP #2: What’s in it for them? Many companies will approach their service providers with demands for change or threats of legal involvement where service levels are consistently not being met. Be different – go to them with an appreciation for their position and understanding of their goals and an offer of genuine collaboration to find a way to not only cut costs in the short term, but to build relationships and potentially more business in the long term.
  • STEP #3: Start now. As I’ve mentioned before, we are finding that the time for negotiation is now so don’t let this get tied up in internal bureaucracy. Start to assemble the best team to answer Steps 1 and 2, and then have those with a talent for negotiating approach the relevant stakeholders at the service provider.

The reality of the situation is that through collaborative renegotiation with your service provider you may together discover innovations that will cut costs not only in the areas you had planned for but also across other divisions of your business, opening up new opportunities for them to extend their business with you.

In conclusion

  • Inefficient, uneconomical, outdated or unworkable service contracts need to be reviewed to drive better ways of working on a win-win basis.
  • Don’t delay. If there is a business case for doing so, approach your outsourced service provider to start discussions early.
  • Find out what the provider’s perspective is and go into contract negotiations with a way of aligning your interests, not making demands but offering a business case for the change to ensure the warmest welcome.
  • Know your targets and goals before approaching your service provider, then develop a strategy in collaboration with them for the best results all round.

Fixed contracts with outsourced service providers can be renegotiated, but it will take collaboration, innovation, and mutual appreciation to achieve this.