Five Guidelines for Renegotiating Outsourcing Contracts

As CIOs and other business leaders embark on a new year, many are asking themselves whether their outsourcing relationships continue to be a good fit or whether they are getting the best value for their money. Indeed, experts predict that companies will renegotiate more than $100 billion worth of outsourcing contracts in 2015. Many companies simply will be renewing legacy contracts, but others will be driven to the negotiating table because of turbulence in their current outsourcing relationships.

Regardless of the reason, a properly approached and conducted renegotiation may better align the client's changing needs with the provider's evolving skillset, and may ultimately benefit both parties. To make the most out of renegotiation, companies should keep several guidelines in mind during the process.

Formulate clear goals for the renegotiation and bring them to the table. A company should assess its short-term and long-term goals for the outsourcing relationship, independent of the pressures of an expiring contract. For example, is the company dissatisfied with the currently adopted metrics for evaluating the provider's performance? Does the company want to adopt new technologies used in the industry? Does the business want to move toward "as-a-service" or cloud offerings?

Then, the business must have an open discussion with the provider about these goals. Legacy agreements may not be flexible enough to adapt to changing business and technology demands, making it especially important for the company to clearly articulate what it wants out of a restructured contract. Ideally, the company should enter into the renegotiation process with a focused list of "must haves," and avoid falling into the trap of simply discussing the need to improve service quality generally and reduce costs. When price is a renegotiation topic, be sure to have a frank discussion--including demanding a breakdown of pricing from the provider.

Build consensus in-house before approaching the provider. Regardless of the ultimate outcome of any renegotiation, it is important to engage, from the beginning, all parties inside the company that are affected by the current outsourcing arrangement. Key decision-makers and senior management should be familiar with the goals and progress of the renegotiation so they won't be surprised when it comes time to signing a new deal. Likewise, individuals "on the ground" will have valuable insight on how the outsourcing relationship can be transformed to better fit the company's demands. Having broad agreement on the renegotiation's goals allows the company to make an easier transition should any changes be necessary--things run more smoothly if everyone involved has already "bought into" the plan.

Once consensus has been reached, but before approaching the provider, the company should also create a formal contract management process. This should include a comprehensive contract documentation system for tracking amendments, waivers, or other changes to the original agreement, and implementing policies whereby only certain authorized personnel may approve such changes.

Avoid operational risk. While some amount of give and take will occur during renegotiation, providers are unlikely to agree to any drastic changes in their operating models. Rather than forcing the provider to stake out unfamiliar territory (which may ultimately produce bad results for both sides), the company should ask whether the provider's current operating model will fit the company's needs in the future. A deep dive into the provider's operations should include an assessment of whether the provider would be a good fit several years down the road. Chances are the provider extends the same mature operating model to multiple customers, which creates a larger sample size for determining the pros and cons of renewing the relationship.

Conduct market research. Companies should research prevailing market conditions and best practices, and assess the competitiveness of its existing outsourcing deal. Contracts inked years ago may have been conceived in "another era" in technological terms, and may not address new innovations. Companies may also discover that other providers offer discounts that may be leveraged into a lower price during renegotiations. In addition, shopping around may provide useful insight into alternative provider options should the renegotiations prove unsuccessful. Information is power at the negotiating table.          

Protect yourself and engage outside expertise.   In addition to retaining and engaging internal expertise, a company should also engage capable outside advisors before and during the renegotiation process. These experts will ensure that the company is protected both in the negotiations and in the future should the outsourcing relationship deteriorate. They may include outside advisory firms that specialize in renegotiating outsourcing contracts and outside legal counsel that understand the future implications of nuanced contract terms. Counsel can also advise the company on how to best protect its attorney-client privilege during renegotiation and in the future. And, of course, counsel can provide guidance regarding termination and dispute resolution as options if the renegotiation turns sour.  

Reprinted with permission from CIO Journal. The Wall Street Journal.