The end of a contract term is typically seen as an ideal time for client organizations to drive improvements in rates and services. Eager-to-please service providers, the thinking goes, will bend over backwards to address issues and retain customers.
In truth, the client’s sense of advantage is often illusory. Replacing an incumbent is a costly, risky, and time-consuming proposition. Vendors recognize this and use this knowledge to their advantage in the negotiation process. Managed properly, however, the end of a contract term does offer clients an opportunity to assess their situation, review options, and drive improvement.
This article outlines five end-of-contract strategies for client organizations.
One: Baseline the Current State
A detailed benchmark analysis of the existing operation provides an essential foundation for assessing end-of-contract options.
First off, understanding existing prices and service levels in the context of market standards identifies where a service provider’s costs are competitive and where gaps exist. This basic information can inform decisions on how services might be expanded, repatriated, or broken up and sourced to multiple vendors.
If the baseline analysis is part of an ongoing program of continuous improvement, the results will likely show alignment with market standards, allowing the renewal discussion to shift to governance issues, innovation, or process efficiency. The baseline should also include costs and functions of in-house staff involved in managing the vendor and providing services. Understanding these often-overlooked costs highlights the implications of repatriation.
The baseline analysis can be conducted through a variety of means, including the execution of a contractual benchmarking exercise, or through a proxy pricing analysis conducted without the vendor’s involvement. Both exercises involve an independent third party that assesses the vendor’s pricing and service levels in the context of market standards.
Two: Be Specific
Specificity in defining objectives and expectations for the service provider is another key to an effective end-of-contract strategy.
The baseline analysis allows for a consideration of options – negotiating with the same vendor for the same services, negotiating with the same vendor for some of the services, bringing some services back in-house, or RFPing the remaining services to one or multiple vendors.
Many organizations are too vague in negotiations, hoping that allowing the vendor(s) to be creative will result in a better solution. This abdication of responsibility for strategic thinking only increases the chances that the vendor will miss the mark. In an RFP scenario, this also results in vendor bids that are all over the map from a pricing perspective, complicating the selection process.
Specificity also applies to pricing adjustments: Rather than negotiating across-the-board price cuts, it can be more effective to target a higher reduction in a service tower where existing charges are significantly above market standards.
An effective RFP process demonstrates to the incumbent vendor and to new bidders that the client is serious about considering changes and is, in fact, prepared to pursue viable alternatives if requirements are not met.
Three: Be Serious
Ultimately, an effective end-of-contract strategy hinges on the client organization’s willingness to follow through and actually make a change in service delivery, whether by rebidding or repatriating individual service towers or, in extreme cases, replacing the incumbent vendor entirely.
Unless the client has demonstrated that a viable alternative exists, service providers have little incentive to make meaningful price adjustments or commitments to improve quality.
In other words, they tend to call the client’s bluff.
A common client tactic is to issue an RFP and assume the incumbent vendor will respond with urgency and action. In reality, the RFP process often becomes an exercise in all parties half-heartedly going through the motions. An effective RFP process demonstrates to the incumbent vendor and to new bidders that the client is serious about considering changes and is, in fact, prepared to pursue viable alternatives if requirements are not met.
Four: Walk a Mile in Their Shoes
Whether the negotiation is cordial and positive or hostile and contentious, the client organization should understand the objectives and goals of the service provider, and use that understanding to define incentives to benefit both parties.
For example, process standardization is one area where client organizations can achieve significant cost savings by granting service providers flexibility to implement change and introduce innovation to the client’s business. This can result in improved performance for the client organization and, at the same time, protect the vendor’s margin in the face of decreasing market pricing.
Five: Think Big
Top-performing organizations are increasingly using the end-of-contract period to consider options to transform the existing operational environment and move toward an optimized service delivery model that leverages the benefits of standardization and utility computing.
Implementing a standard service or utility model requires redefining the commercial terms of IT service provision in a way that ensures effective demand management from the business, coupled with optimized efficiency from the service provider. This requires incentives that push both sides toward standard service delivery rather than highly customized (and inefficient) solutions.
Whether the client organization’s objectives are tactical or transformational, a detailed understanding of the current state, of the relative benefits of different options, and of the service provider’s perspective are essential to an informed and effective end-of-contract sourcing strategy.
Bob Mathers is a Compass Principal Consultant specializing in sourcing relationship and governance issues.