The Best Time to Negotiate an Outsourcing Contract
The last days of an outsourcing contract are the perfect time for customers to bargain with their IT service providers for better service and prices. Yet few customers take advantage of that end-of-life leverage, and those who do often wield the power as a cudgel and do more harm than good. Here are six best practices for making the most of the last days of any outsourcing deal.
CIO — The final months of an IT services contract are an ideal time for outsourcing customers to negotiate with their vendors for improvements in price and service quality. As the deal end-date approaches, the customer wields more power than at any other point in the relationship since the client can seriously consider alternatives without the threat of termination fees or other penalties.
The only catch is that outsourcing vendors know just how difficult it is for customers to actually cut the cord. "Client threats to repatriate or go to RFP [can] ring hollow as vendors recognize that replacing an incumbent is complicated, expensive and risky," says Bob Mathers, senior consultant for Compass Management Consulting.
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As a result, many outsourcing customers watch the contract termination date come and go without taking full advantage of the opportunity that accompanies an outsourcing deal's natural end. "Renewing with the existing vendor and taking the nominal discount they offer is quick and relatively risk-free. That's tempting in today's environment and might very well be a reasonable choice," Mathers explains. "But you've got to do your homework on what other options are available and what you might be leaving on the table."
At the other end of the spectrum, some outsourcing customers get drunk with power as the end of term approaches, and they demand arbitrary, across-the-board rate cuts without considering existing services or business requirements. That can lead to one heck of a hangover.
"If you're demanding aggressive cuts based on intuition or from what you've been told on the seventeenth tee, that can be very dangerous," says Mathers. "If the client drives price cuts to the point that the deal is unprofitable for the vendor, the vendor will not be motivated to deliver quality service, put talented people in place, or be responsive or innovative to client issues."
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Any increased influence an outsourcing customer has near the end of a relationship comes not so much from the impending end date, but from an increased understanding of organizational needs and market rates. Knowledge is indeed power. "The true leverage comes from demonstrating that you understand your existing situation, have explored alternatives, and are willing to pursue them if necessary," Mathers says.
While the wholesale shift of IT support to another vendor or back in-house is rare, splitting up large agreements among multiple providers is not. The vendors know this and should be open to discussions about taking on discrete pieces of the larger outsourcing pie. "Demonstrating that you are seriously looking at these options is the first step to gaining some leverage in discussions," says Mathers.
