Many variables make navigating outsourcing contracts challenging and confusing. Contract reviews are detailed assessments of a potential or existing contract’s favorability for a company. They are useful in determining whether the deal is advisable, what are the best areas to focus on while signing up for renewal, and which contracts can be exited most easily during a Vendor consolidation.
Contract reviews facilitates new deals, re-negotiations, and exiting relationships. For existing contracts, timely contract reviews help in assessing the contract performance and identifying the areas of improvement/opportunities/potential threats that determine the favorability of the contract. The provision for periodic contract review is essential for longer engagements. This provides an option to fine tune your baseline and optimize your spends based on actual utilization and changing market trends.
On the other hand, a new contract review assists in effectively comparing solution offerings of different vendors and selecting the right vendor. An experienced Sourcing Advisor can aid in taking a more selective sourcing approach that meets specific objectives while maximizing savings.
Points to Consider While Reviewing Contracts
- Solution Competitiveness – When there is more than one competitive bid, which one is best for you?
- Price Competitiveness – Is the deal fair financially when compared to market pricing?
- Accuracy of Scope – Is the contract scope in line with your business and financial objectives. Example: mix of services, delivery vehicles, and level of services.
- Appropriate Service Levels – Are the service levels fair, measurable, and enforceable?
- Terms and Conditions – Are the all terms and clauses, like exit clauses, favorable? Are any important clauses missing?
- Service Delivery Platform – Is the technology and delivery architecture used by the vendor to provide services aligned with contract standards?
- Others – Are there any missing items or anything misleading? Example: scope mismatch between financial proposal and technical proposal, etc.
7 Best Practices for Smooth Contract Renegotiation
1. Be very clear about your Business intentions
You should be aware of all the aspects of the deal and should have a detailed understanding of your business requirements so that relevant levers in the agreement can be pulled, to achieve the stated objectives. That means spending ample time with your business leaders for understanding their needs; synthesizing their input; and translating those needs into a set of goals that need to be achieved through renegotiation.
2. Evaluate Contract Performance
Review performance levels both internally and with the vendor. Determine whether the intended objectives have been achieved or not, and if not, why not. Bring out the points of concern in the renegotiation meetings with your vendor. The success or failure of an Outsourcing Contract is dependent on effective vendor management and the governance structures which have been put in place.
3. Have Clear Rules of Engagement
Set out and agree clear rules with your vendor before you start the re-negotiation process. These should include a charter of behaviors and principles to be applied throughout the process, the number of senior-level people to be involved from client and vendor side, and a timeline for calling off the renegotiation process.
4. Avoid hastily Negotiating a Contract
You should be armed with plenty of facts and figures to make your business case. Do a detailed review of your services and have a clear picture in mind as to what are the business objectives that are to be achieved through this contract. Work on a collaborative discussion with your Vendor that brings out your concerns and goals as well as ways to manage them.
5. Bring an Appropriate Team for the Re-negotiations
Do not re-negotiate a contract using only the account, service management and governance team on both sides. They are typically focused on short term issues and actions; and lack the executive mindset and big-picture view. Your team should be aware of your wider business needs, and not just immediate requirements. Hence identify and engage a corporate leader to act as the focal point for your negotiating team. Also ensure that your Service Provider’s corporate team is aware of your goals and is engaged at every step of the process.
6. Extend Your Contract
If criteria such as end-user satisfaction and service level agreements are being met, and the contract is meeting your needs, the agreement with your existing service provider can be extended. However you still need to figure out latest developments and important amendments and build them into your existing contract. A rigorous external benchmarking exercise is critical to achieve this understanding. An Advisor can help you negotiate the best extension with their in-depth market insight and benchmarking experience.
7. Contract Termination
The cancellation of an Outsourcing Agreement may happen due to following reasons:
- Your existing Provider has failed to deliver particular services to your satisfaction
- Commitments of process improvement and efficiency not being honored
- Your requirements have changed to such an extent that a vendor with a different set of services and areas of expertise is now required
In the event of a Contract being terminated, you can exercise a number of options:
- Bring in an Advisor to guide you on ‘Exit’ Strategy’, ‘Risk Identification & Mitigation’· Transfer whole or a part of your Outsourced services to a different Provider
- Keep your existing Service Provider in some capacity
- Bring some of the Outsourced services back in-house – here you need to determine if you have the right infrastructure and team in place to support such a move
- Enter into a new contract