- Outsourcing is as important as selling for organisations, as it has a direct impact not only on profitability, but also on the organisation's ability to adapt to what is still a volatile global economic environment.
- Significant opportunities exist for organisations to capitalise on their new bargaining strength as a result of the current recession, but many organisations seem to be overlooking these, in favour of more traditional cost cutting initiatives, like redundancy.
- From a supplier's point of view, forewarned is forearmed and a little flexibility in renegotiating now could potentially enable suppliers to maintain good relations with existing customers beyond the current lift of outsourcing contracts, whilst generating new opportunities in preparation for the eventual economic recovery.
Irrespective of the fact that it is widely regarded as best practice for organisations to review their outsourcing contracts every year, a recent survey of 200 businesses by a UK law firm revealed that 63% of the organisations surveyed would not be reviewing their outsourcing contracts this year. Most attributed this to the perceived time and costs in relation to the review process. One in ten suggested that they were contemplating taking services that had previously been outsourced back in-house.
The situation is not just confined to the UK. Suppliers across Western Europe are being subjected to strong pressure from their recession hit customers to review their IT infrastructure outsourcing arrangements. The majority have renegotiated the terms of these contractual relationships within the lifetime of the contract and it appears that the lack of flexibility on the suppliers' part remains a key issue prompting renegotiations.
Unsurprisingly in the current climate, cost reduction continues
to be the main consideration for IT and BPO outsourcing companies.
Whilst cost reduction continues to be the main driver, other issues
such as a review of the overall aims of the technology benefits or
innovation which the supplier could deliver are also highly
relevant, and provide the supplier with an opportunity to turn
these negotiations to their mutual commercial advantage.
The basis for any effective renegotiation review for customers lies
in the identification of all potential sourcing options, including
returning previously outsourced services back in-house and
multi-sourcing options. Reducing the workforce and increasing the
remaining workforce's responsibilities is not a recipe for
improved quality or efficiency.
From a supplier's standpoint, undertaking a professional assessment of current procurement practices is also a potential way to reduce costs and increase efficiency. However, this would be of limited use if the necessary benchmarking measurements are not also put into place. Presently, one out of two outsourcing arrangements is still not currently supported by a formal strategic measurement framework.
As such, as well as being a cost cutting exercise for customers, both parties should ensure that renegotiated contracts are thoroughly reviewed in the light of the changing business environment so that the opportunities for technology benefit or innovation are not lost. Reviews should also contain appropriate benchmarking provisions as a priority for both parties.
How we can help
- We provide an innovative approach to contract negotiation, incorporating "Game Theory" and behavioural psychology.
- We have experience in drafting appropriate benchmarking criteria for our outsourcing clients.
- We advise individuals on current good practice in relation to measuring and capturing innovation in contracts.
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.
