Current economic conditions require companies to realize cost savings quickly, and existing outsourcing relationships are a popular target. In most cases it should be faster and cheaper to re-negotiate an existing deal than it is to engage in a traditional competitive procurement. This approach allows a company to leverage the existing contract instead of spending resources to identify and transition to a new supplier.
A typical outsourcing engagement lasts anywhere between three and seven years, and, naturally, issues are bound to arise in that time. Re-negotiation provides an opportunity to address these issues, be they pricing, solution, governance or something different entirely. However, if the answer to whether to renegotiate were this simple, everyone would do it. Several key issues drive whether re-negotiating your existing contract is the way to go, or if the possibility of quick savings is more hope than reality.
Some contracts are better candidates for re-negotiation than others. It can be difficult for a company to determine if a particular contract is suitable for a re-negotiation. Naturally, re-negotiation may become more attractive as the expiration date draws nearer, and service providers are more willing to cut a deal late in the contract life cycle. In practice, most customers consider re-negotiation before that time. If you are wondering if your contract is a good candidate for early renegotiation, here are some points to consider:
1. Give the Relationship Time to Settle: Don’t try to renegotiate in the first two years of the deal. It can take that long for the relationship to “settle in”, and moving to restructure before the settling is complete could make things worse. Of course, if some serious misalignment has occurred early in the life of the contract, this calculus might change, but generally speaking this rule holds true.
2. Targeted Areas for Change. There may be specific areas in your contract that you recognize are out of alignment with the market. Generally, these types of targeted areas relate to market-driven changes in the prevailingly pricing or technology. The key is to take advantage of the existing relationship (and contract structure), and stay focused on the targeted objectives for the change.
3. Supplier is Still a Good Fit: Re-negotiation is unlikely to be successful if your working relationship is already on the rocks. Furthermore, as the customer, you should assess whether the supplier’s capabilities have proven to be matched to your company’s objectives. This is especially true as corporate objectives can and do change over the typically long life of an outsourcing contract.
4. Switching Costs: Ask yourself this question at every turn: does transitioning to another supplier present significant switching costs and/or business risks that far outweigh the potential benefits? Consider the actual transition charges that a new supplier may charge, in addition to the magnitude of internal resource commitment necessary to select, contract, and transition to a new supplier who may be new to your environment. Learning curves can negate the value of a few saved bucks if not managed properly.
5. Costs can mean more than money. Consider your negotiation tactic carefully. An overly aggressive negotiation posture may damage your relationship with your supplier moving forward.