by Stephanie Overby

6 tips for renegotiating service contracts

Apr 24, 20205 mins
BudgetingCloud ComputingIT Leadership

Tight times require a fresh look at existing contracts to see how costs can be curbed or new capabilities can be obtained — but a collaborative 'win-win' approach is your best bet.

Man in suit signing contract planning strategizing
Credit: Thinkstock

The ongoing COVID-19 crisis has compelled IT leaders to consider their costs even as they secure new capabilities to carry their organizations through uncertain times. For this, taking a look at existing service contracts can be beneficial.

“Now is a critical time to get in front of immediate needs and potential long-term changes to IT services contracts,” says Bill Huber, partner in the digital platforms and solutions practice at global technology research and advisory firm ISG. “This is a climate where change is potentially more achievable, and work can commence on restructuring agreements to meet the needs of the next normal.”

There may be opportunities to not only save money on existing contracts but also shift resources and focus to meet changing business needs.

“It’s a great time to be considering renegotiation,” says Brad L. Peterson, partner in the Chicago office of law firm Mayer Brown. “The current situation compels change in some, and it creates opportunity in others. The companies that consider the options now will secure the best deals with the shortest time to benefits realization.”

However, renegotiating service contracts in a time of distress requires finesse. Doing so successfully in a way that works for both the service provider and customers requires some understanding of what’s no longer necessary and what new needs are emerging. It also requires a collaborative approach.

“In the current environment, aggressive renegotiations may come across as tone deaf,” says Marc Tanowitz, managing director with Pace Harmon. “We recommend a more partnership-oriented approach focused on ‘re-solutioning’ to achieve the intended outcomes.”

IT leaders can navigate these renegotiations most successfully  by handling them with clarity, expedience, and care using the following guidance.

Determine which contracts are the best targets for cost savings

“Most IT services contracts have room for significant savings opportunities,” says Tanowitz.

The key is prioritization.

“[Ask] which contracts will meet a critical need through renegotiation,” Huber advises. “Those critical needs could be cost or cash flow adjustments or scope adjustments. Clients need to focus on the ones where it matters most.”

Those agreements that have not been comprehensively managed or evaluated over the past three to five years are most likely to offer savings. In addition, “contracts that are strictly labor-based are likely to offer quick-hit savings opportunities that are more straightforward to identify and capture,” Tanowitz says. “While more complicated to capture savings, managed services agreements where the services are underutilized also present a potentially significant savings opportunity.”

Identify agreements where the current situation compels change

In some cases, the requirements or basic assumptions underlying the financial structure of the deal may no longer be valid. “For example, the supplier may not be able to fully perform, or the customer’s needs may have reduced dramatically. In those cases, you can drive for not merely a fix but a better contract,” Peterson says. “But, you don’t want to renegotiate contracts where you’ve locked in rights to now-scarce resources or now-low prices.”

Perform a comprehensive assessment of the deal

Identify areas that can drive immediate benefit. “This may include reviewing invoices to identify errors, rationalizing spending or reducing consumption or volumes where there is flexibility to do so, leveraging contract terms that provide flexibility (such as business downturn rights), and re-architecting the solution to achieve mutually beneficial outcomes,” Tanowitz says.

Adjust your approach based on the relationship and the services

Don’t play hard ball with a provider you are critically dependent upon or with whom you plan a longer-term relationship. “Determine who will be your long-term strategic partners, who won’t and who could go either way, and negotiate accordingly,” Huber says. Now is not a good time to shake things up unnecessarily with a critical service provider.

Be straightforward

Renegotiation is unlikely to be at the top of your provider’s agenda so make it as easy as possible for the vendor to understand what you’re seeking. “Everyone’s distracted now,” says Peterson. “Put in the extra effort to think your proposal through until it’s clear and simple.   Also, we are pulling together in this crisis, so go the extra mile to ‘think win-win’ and create acceptable proposals.”

Don’t renegotiate just because you can​

“These are challenging times,” says Tanowitz, “and those organizations that are taking a collaborative approach with their service providers are having the greatest success.”