Home Page > Publications > How To Effectively Renegotiate Your Outsourcing Contract

Back in 2007 many outsourcing contracts came up for renewal and some of those are now due again or will be coming up for renewal in the coming 18-24 months. For some of you the vendor delivered satisfactorily and for many of you the vendor has been under-performing in certain areas and did not deliver according to expectations. Now is your chance to change things and take advantage of renegotiation.

- Renegotiation is a dialogue aimed at agreeing scope/contract changes with an existing supplier. It represents the first step in trying to redefine SLA's and terms that you would like to see improve. If contract expiry is imminent, the client needs to either agree to an extension with the current supplier, find a new supplier, or bring the work back in-house.

- Second, there is the issue of an under-performing supplier. We see many clients not satisfied with price, resources, quality of coding, late delivery, poor account management. Underperformance may or may not entitle the client to compensation depending on what was in the original contract, but it undoubtedly provides a reason to renegotiate.

- Poorly worded contract, we see many contracts that have poorly worded definitions for scope and SLA's, which often can only be resolved through renegotiation.

- In the last few years many business have evolved and gone through major changes of downsizing to accommodate falling revenues, this inevitable will also lead to contract renegotiation.

Given the above mention drivers often mean the renegotiation is a complex task. Successful outsourcing relies on building sustainable relationships, not paralyzing vendors on price, and smart negotiators will seek to ensure the relationship is underpinned by clear mutual benefit on both sides. Ultimately, however, the outcome of renegotiation will depend on the negotiating position of both parties, which will be largely determined by the options available to the client.

Improving your renegotiating position by developing alternative options is a long-term task that should start before the original contract is signed and continue throughout the deal. The following broad concepts are the most important considerations when renegotiating an outsourcing contract:

Create A Competitive Environment
Vendors that know they have secured your business are better able to seize control of the negotiations. In this market don't be afraid to open up bids to tender; the competition will help you reduce costs. We often see vendor pricing become uncompetitive after a few years on the same gig, and they will often re-allocate top talent to new client engagements. A consistently competitive environment will help mitigate these risks.

Build A Relationship
There are more to projects than timelines, costs and benefits. It is about building a personal connection with your primary contacts within the vendor, to create a strong sense of loyalty and commitment. It's easy to find creative ways that go beyond the negotiation process.

Most vendors can do an OK job at delivering a service, but you want to work with a partner who will go the extra mile, not just think about the individual project tasks. Ideally, you want to develop a partner who is willing & able to take on additional responsibilities without always referring back to the contract. During the sourcing process, call some of their clients to find out more about their culture and if they act more as partners or vendors. "There is a real need to drive contract terms and legal conditions, but in the end, no contract in the world will adequately cover your long-term goals and expectations. Build a solid, true collaborative partnership with your vendors. It will pay off in the long run. When things go bad, and they most certainly will, who would you rather have at the table? A vendor or a partner?" -- Rick Hamilton, director, service delivery, Cisco Systems Inc.

Understand Vendor Priorities
Make sure you understand the value on the other side of the table. Sometimes points which are irrelevant to your organisation can play a significant role for the vendors, and vice versa. Prepare "easy" concessions to broker a win-win contract. If both partners cannot get value from the investment stay clear of it.

Share Your Priorities With A Vendor
If you currently have an issue with a technology or process, there is a high chance the vendor can help. They will find a way to provide the best solution and might already have solved this elsewhere. Bring up these priorities before renegotiating as it will help you decide if the vendor is the right one for your organisation.

As commented on Computerweekly "A clear and disciplined approach for the renegotiation sessions themselves is essential. Central is the use of a single, jointly edited version of the contract, capturing revisions to the agreement in real time. Progress will rely heavily on the quality of the underlying relationship between client and supplier, as mistrust or tactical games will delay or derail agreement". Renegotiation is not a panacea or an unrealistic landscape, create a mutually beneficial contract and there is no reason why you cannot create a win/win situation. Redrafting a contract is no substitute for maintaining strong governance with your supplier. Where problems persist, termination and retendering may well be the right answer. The ultimate goal of contract renegotiation is to meet your pricing, service and quality goals with as little risk and overhead as possible. The mere presence of a competitive threat is good - but the ability to build strong relationships with suppliers puts a buyer of services in a much stronger position. A thorough understanding of the supplier priorities combined with a relationship founded on a partnership are vital - particularly in complex engagements. Therefore, a competitive environment should be a foundation to your approach - followed through with fearlessly executed vendor management principles. There is no reason why your organisation cannot be successful at the next contract renegotiation if both parties walk away feeling they got a good deal.

Quick Contact Form
Company Name
Contact Name *
Telephone Number *
Email Address *