Restructure Your Outsourcing Contracts to Derive the Best Value

As enterprises regroup to prepare for the new normal, priorities are shifting toward projects and investments that provide immediate operational sustainability, without compromising future growth. As an IT leader, you will want to ensure your existing sourcing models and contractual engagements are aligned to support the new operating reality.

The pandemic has pushed many companies to fast-track their digital transformation, and they’re relying on third parties to help them do so. At a macro level, it is still a buyers’ market, and your contracts should reflect that. However, we’ve found the opposite to be true—every contract we’ve reviewed has shown plenty of room for improvement, many of them riddled with clauses in favor of the supplier. Could this be the case for your contracts?

To derive the best value from your outsourcing arrangements, we believe you should consider restructuring your contracts. This could take the form of a renegotiation (resulting in a renewed and improved contract with the incumbent vendor), or a recompete exercise (resulting in a better contract with a new vendor).

For example, Wavestone recently ran its proprietary Contract Health Check for a global high-tech manufacturing company and its contract with an IT provider, uncovering a 33% cost savings opportunity. As a result of this assessment, we identified potential savings in areas such as adherence to contracted terms, solution optimization and automation, and staffing pyramid enhancement in the provider’s team. When the client asked Wavestone to manage the RFP (request for proposal) and contracting process as part of the recompete program, we drove additional competitive synergies to achieve 41% in total cost savings.

The following table breaks down the contract improvements from the engagement, ranking them from very high ease of realization to low.

Applications Outsourcing Contract Improvements for a Global High-Tech Manufacturer

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Of the four contract elements listed above, pricing and solution improvements are the easiest to obtain using Wavestone’s expanded benchmarking methodology and contract database. Our contract database consists of software, hardware, and services vendors in the market. It also includes market pricing and discount levels, requests for information (RFI), and RFP responses, as well as differentiation, capabilities, and references. Empirical data from recent deals affords us the leverage to push for better pricing and solutions with little to no negotiations. During the coronavirus lockdown, this proved to be the most effective approach for us to help our clients quickly unlock cash and optimize cost—and we were able to do it remotely, too.

The findings from the Contract Health Check served as both the target position and roadmap for the subsequent RFP process. Using these market “benchmarks” enabled us to restructure and renegotiate the service-level agreements (SLAs) and terms and conditions, delivering an additional 8% savings for the client with improved commercial provisions.

These cost and contractual improvements are really good, but what made this outcome great for the client is the final contract element Wavestone incorporates in its sourcing engagements: Overall Experience and Relationship. In the above situation, while the end-users were operationally satisfied with the service provided, they didn’t view the incumbent vendor as a strategic partner that proactively recommends and delivers cost and performance improvement measures. In today’s business environment, the buyer-provider relationship needs to be treated as a strategic partnership for successful engagement, so we helped structure a mutually beneficial go-to-market arrangement between the client and the vendor.

Of course, before embarking on anything new, there is the all-important question you need to ask yourself: What do I want to get out of this process?

Define what “best value” is to your organization with the following key areas in mind:

1. Tech solutions and automation: What are the solutions and platforms used to deliver services? Well-represented technical and automation solutions consistently achieve year-on-year efficiencies.
2. Right-sizing: Reduce the bloat in the vendor’s team size and overheads.
3. Pricing model: Analyze the current pricing model as it might not be the right model for the engagement, and you might be paying more for what is being consumed.
4. Pricing: Benchmark vendor pricing as this is frequently the single largest source of cost reductions
5. Performance: Recalibrate the existing provider-friendly SLAs to best-in-class SLAs with stringent fee-at-risk and consecutive SLA default penalties.
6. Contractual terms and conditions: Reassess the key terms and conditions for certain provisions which might lead to higher contract costs, including COLA (cost of living adjustment) clauses, forex, service credit earn-backs, dispute charges, and so on.

Restructuring your outsourcing contracts to fit the new reality is the best move to make right now. From cost optimization to performance improvement, there is plenty to be gained when an RFP process is conducted effectively and in tandem with a contract health check to provide the foundation for future work.

Authors

Rahul Gehani, Principal

Rahul Gehani is a highly tenured benchmarking and sourcing expert. He has experience in executing price benchmarking initiatives in a variety of outsourcing scope areas including IT ADM, IT infrastructure, FAO, PO, and HRO. He has led over 150 IT-BPO and advisory engagements across North America, UK, EU, Australia, EMEA, and India.

John Webber, Practice Partner

John Webber is a recognized IT leader with more than 30 years’ experience in sourcing and complex business transformation. Having represented both service provider and advisory sides of the contract, handling over $13B in contract value, John boasts extensive international experience in leading negotiations for diverse managed services. He is a trusted advisor to Global 500 executives in the development of sourcing, transformational, and multivendor strategies.