Outsourcing agreements are typically multi-year contracts ranging from three to five years in length. As the client environment changes over time, a client may determine that it is in the company's best interest to pursue an early renegotiation of the outsourcing contract in order to achieve different business results.
Are you too nervous to approach your provider about renegotiating your outsourcing contract? Are you afraid that the mere mention of the "R" word will lead to degradation of services and of the relationship? Don't worry – chances are, your provider hates your outsourcing contract too. It has been found that providers, once they have a chance to absorb the message, are willing partners in the outsourcing contract renegotiation process.
Four of the most prevalent reasons for renegotiating an outsourcing contract from the provider's point of view are described below.
- 1. The Ability to Extend the Contract Term - You may be concerned about the impact of requesting price reductions as part of the renegotiation process. While the provider may not initially like this (why would they?), they understand that market forces are driving IT support costs down and will be open to lower run-rate pricing in return for extending the contract term by a couple of years so that they can maintain (or even improve) their overall total contract value (TCV). As long as the contract is structured to allow you to realize the benefit of future cost reductions and improvements, this is an acceptable trade-off that results in a win-win for everyone.
- 2. The Ability to Realign Prices with Their Internal Costs - As technology, support structures, and the outsourcing market evolve, the pricing mechanisms currently included in your contract may no longer be relevant for either you or your provider. For example, perhaps you currently have an Additional Resource Charge (ARC) for adding a server to your environment, but the rate seems too high in the current market. For the sake of this example, assume you currently do not differentiate between server instances and physical servers - they are all treated the same. During the contact renegotiation process your provider will probably concur that the current rates are too high and come back with a different price structure that can be used in return for reducing the overall server support rate. So, perhaps you devise a pricing mechanism for "server instances" at a much lower rate, and you develop a higher rate for "physical servers." Net/net, your overall server support costs go down, but the provider is protected because their real cost driver (in this case the addition of a new physical server) is still covered. This is only one example - there could be many variations of this theme across each of your towers.
- 3. The Ability to "Re-Transform" the Environment - When your original outsourcing agreement was implemented, there was probably an assumption of the "new" or "transformed" technical environment that would be implemented and supported by the provider. Chances are, things didn't go quite according to plan, and even if they did, the environment in place today probably doesn't represent the best-in-class environment that would provide the highest performance and availability at the lowest support cost. Through a renegotiation, the provider may be able to propose some one-time transformation activities that implement tools, technologies, and architectures which allow them to better support the environment at a lower cost to you. Typical transformation activities can include things like applications rationalization, server consolidation, remote infrastructure support, and service oriented architecture. By carefully considering these types of transformation options, it is possible for you to improve the performance and flexibility of your IT environment while also making it easier and less costly for the provider to support.
- 4. The Ability to Restructure Service Delivery - In order to achieve your desired price reduction while also aligning their services to their standardized offerings, the provider may want to move more support offshore, standardize server platforms, and implement or increase the use of remote infrastructure support. Assuming they can address any concerns you may have regarding service delivery, your provider should be able to reduce their support costs by standardizing operations and using low cost labor, while maintaining (or possibly even improving) service delivery to you. Depending on your current contract, it is possible that the provider can technically do some of this work now, but the reality is that a certain amount of equilibrium usually sets in, and it usually takes a significant event such as a renegotiation to truly make these kinds of changes.
It is possible to have positive, productive discussions with your provider regarding outsourcing contract renegotiations. In addition to satisfying your requirements while maintaining overall revenue and/or profit, the provider can use contract renegotiation to improve their long-term ability to support you while realizing additional standardization and cost efficiencies.
_______________________________________________________________________________Ben Trowbridge, Founder & CEO, Alsbridge, Inc.