Canada: Negotiating Outsourcing Contract Renewals

You have an important outsourcing agreement that is coming to an end. It's a significant contract for your organization. Under it, a supplier is taking care of all your hardware needs (mainframes, servers and desktops), otherwise known in the trade as information technology (IT) infrastructure, as well as operating your software on a hosted basis and doing software development for you. Even if it were performing just one of these three functions, it would still be a very important supplier relationship for you.

You're not alone. Estimates differ, but probably around 200 of these critical, large-scale outsourcing deals are coming up for renewal in Canada over the next few years. And while the mix of services covered by these deals may vary, the common denominator to all of them is that they are very important, and if the renegotiations are managed properly, the result can be better renewals.

Making Your Contract "Market"

The importance of the outsourcing contract renewal opportunity is driven largely by the fact that your present deal is likely not reflective of current market conditions. This shouldn't come as a surprise to you. Your current deal may be seven to 10 years old — some that we're working on go back 15 years, well into the 1990s, once you consider they have gone through one, two or even three previous renewals (and these prior renewals typically have not gone through the rigour I suggest below).

Well, the world has changed fairly dramatically in the last decade. Your requirements have changed. The technology has changed. The demands of the increasingly global marketplace have changed. But very likely, your outsourcing agreement has not changed — or not nearly enough.

The agreement's description of the services you actually use, or actually need, may be extremely out-of-date. The service levels you have may be measuring the wrong things, or not enough of the new things that really should be measured. Your service-level credit mechanism (if indeed you have one — some older agreements don't have this importance device) may be incentivizing the wrong behaviour — and not doing enough to promote the right behaviour on the part of the supplier.

You also have the queasy feeling that you're paying too much for what you're getting. Many hardware and software costs have dropped over the past 10 years. As for people costs, while human resource expenditures have increased in North America, the movement of a range of IT and business process functions to lower wage jurisdictions like India and the Philippines has had a dramatic impact on overall labour costs as well. And you're concerned you're not seeing the benefits of these cost savings.

As for the outsourcing contract's terms and conditions, again, much has happened in the marketplace since the late 1990s. To mention but one example, many agreements from that era that are still being used today don't even contain the word "privacy." Given the changes in privacy law over the past decade, the current sensitivity to privacy breaches, and the importance of security and confidentiality policies in today's Internet-based and networked world, you can be sure that privacy issues are front and centre in today's terms and conditions for outsourcing and offshoring deals (so your current agreement, if it dates from the 1990s, or even the early 2000s, may be woefully out-of-date).

Start Homework Early

In order to be able to meaningfully address the relevant service, price and contract terms issues in an outsourcing contract renewal, the key is to start your homework early. Sadly, if you're already in the final year of your current agreement you are probably too late.

To be effective, you have to start your homework about 24 months before the end of the current term. Your homework phase will take four to six months. Then you must allot about two to three months for Term Sheet negotiations with your current supplier. And if you can't come to a new deal with the incumbent supplier, you'll need 12 to 15 months to go to market for another supplier (or two or three of them), including transition time. Hence the importance of starting early.

If you are in the last year of your current agreement, however, consider negotiating a one- or two-year extension to your present deal, on essentially the same terms. This is merely to bridge you over so you can do the full, proper renewal process in that year or two. In some agreements, the customer has this right of extension built into the current agreement — it can be a very useful provision indeed.

Realigning Services

An important — and time consuming — part of your homework is to realign the outsourcing agreement's services description with your business. Inevitably, your business has changed in a number of fundamental ways over the past decade. Your markets and customers may have changed — sometimes dramatically. Your own products may be quite different — or if they are relatively unchanged, the way they are produced, marketed and sold likely has undergone a minor revolution.

So, the first step is to reach out to your business units, and their leaders, and have full and frank discussions about the services being outsourced, and how they can be modified — or sometimes redesigned altogether. This can be a good opportunity for a wholesale rethinking in some cases of which IT services you need — and which ones you no longer require.

Updating Service Levels

You will often find, in the course of such a review, that even where a specific sub-service is still required in more or less the same fashion as it was provided 10 years ago, what has changed is the required service level. A decade ago, a 98.5% uptime standard for a particular IT support function may have been adequate — or that level of service may have been all that was available in the market place.

Today, by contrast, the best practice standard for the same service may be "five nines," that is, 99.999% uptime. To use a low tech analogy, you still need more or less the same automobile, but 15 years ago the windows had hand cranks, while today power windows are standard. In essence, you don't want to go through another contract renewal without getting the equivalent of power windows.

Recalibrating Price

Not only do you want the equivalent of power windows, you can remember from the last time you upgraded your car that a lot of the new features — like front and side air bags — were included in the price, and that that price was fairly competitive (particularly in light of all the new features that were "standard"). Meanwhile, you have a sense that the prices under your legacy outsourcing agreement may no longer be competitive.

The surest way to test what is current market pricing is to go out to the market with a thorough RFP process, and to invite leading suppliers to submit competitive proposals. Then, when their bids are submitted, you would typically negotiate price (and other terms) with at least two of them to truly determine what their best price and terms would be.

If you decide against a fully competitive RFP, there are still ways of reviewing what market prices should look like for your suite of outsourced services. One method is benchmarking, where you tap into the database of relevant prices kept by a firm that collects precisely such data for just such a purpose. While benchmarking is not an exact exercise — some say it's far more art than science — it can give you a meaningful sense of generally where you are on a continuum of price points for similar services.

Updating Contract Terms

Another area that requires attention is your contract's terms and conditions. In essence, there are many provisions that would be included in an outsourcing agreement today that were only rarely — if at all — addressed 10 years ago. Therefore, it is strongly recommended that your agreement be brought up-to-date as part of your contract renewal with your vendor.

The kinds of clauses that we see being inserted in effectively negotiated renewals include those dealing with: benchmarking (essentially, the process mentioned above is enshrined in the agreement for subsequent use), privacy, security, confidentiality, service-level remedies, and new approaches to intellectual property indemnities and limits on liability (to name just a few).

Term-Sheet-Based Negotiations

Once you have done your homework on services, service levels, pricing and contract terms, you should reflect your wish list in a meaty Term Sheet. Then, assuming you decide not to undertake a competitive RFP process, you would present your current vendor with the Term Sheet accompanied by a succinct message: "If you and we cannot come to an agreement on the provisions contained in this Term Sheet, we will go out to market with a full RFP." And you might add that your current vendor will not be invited to respond to that RFP.

What then follows is typically a very meaningful negotiation period, capped off by a sensible win-win renewal/amendment of the current contract, but containing a range of changes that address your reasonable requirements. Renewing outsourcing agreements on any other basis amounts to wasting a golden opportunity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions