Compass Urges Organizations to Be Prepared When Renegotiating Sourcing Contracts.

End of Contract Term is Critical Time to Drive Improvements, Yet Often Mishandled

NAPERVILLE, Ill. -- The end of a contract term is often considered the best time to negotiate improvements in services, pricing, service levels and commercial conditions in a sourcing contract. The rationale is that service providers are more willing to make concessions in order to retain business. However, many client organizations go into the negotiating process over confident and under prepared.

"Organizations should remember that renegotiating does not mean simply exchanging concessions," says Bob Mathers, principal consultant at Compass. "The ability to drive change requires a proactive process of defining what you want, and evaluating the available options. Many businesses don't prepare and assume that the end of a contract brings significant power to negotiate change. It doesn't."

Compass identifies five strategies to help organizations drive improvements in end-of-contract negotiations:

* Baseline Existing Operations: A baseline analysis identifies where a service provider's services, commercial terms and pricing are competitive and where gaps exist. At the end of a contract term, this information provides a stake in the ground to define priorities for the renegotiation. For example, if prices are dramatically out of line in certain service areas, then making adjustments in those areas should top the agenda. However, if the baseline analysis is part of an ongoing program of continuous measurement and improvement, existing costs will likely be competitive and aligned with market standards. In that case, the focus of the contract renewal discussion can shift from cost reduction to governance issues, facilitating innovation, or improving process efficiency.

* Specify Objectives: The baseline analysis should be used to define specific points to address in negotiation. For example, rather than demanding across-the-board pricing concessions, focus on a 20 percent reduction in an area where existing charges were found to be significantly above market standards. This also ensures alignment of each service tower to market. Have a response ready if the vendor is unwilling to address requested improvements in specific towers of services.

* Get Senior-level Support: Boardroom objectives must be aligned with and communicated to the executives charged with implementing the end-of-contract strategy. Make sure the work done by the IT executive managing the deal does not get erased by the top executive signing the contract.

* Be Willing to Pursue Other Options: Ultimately, an effective end-of-contract strategy hinges on the client organization's willingness to follow through and actually make a change in service delivery. Gaining that credibility, in turn, requires preparation and assessment of alternatives, and development of viable options - and communication of those options to the service provider.

* Consider the Vendor's Perspective: By understanding and addressing the service provider's interests, a client organization can make the negotiation a win/win rather than an exchange of concessions. Bring incentives to the negotiation table that can benefit both parties and make the discussion a win/win rather than an exchange of concessions. For example, rather than focusing on price reductions, clients can give service providers latitude to standardize and streamline internal processes, resulting in savings for client organizations while allowing the vendor to maintain its margin.

About Compass

Founded in 1980, Compass (www.compassmc.com) is a global management consulting firm specializing in business and IT operational improvement. Compass' fact-based approach enables clients to achieve world-class operational performance, optimized sourcing, alignment between systems and business processes, enhanced process maturity, and maximum value from investment in information technology.