Renegotiating an Outsourcing Contract | Article

pencil in lightsIt’s rare for a customer to have the opportunity to renegotiate an outsourcing contract. Last year Tom Rideout rewrote two.

Rideout, who heads technology delivery for Johns Manville, a building materials company in Denver, Colorado, was delighted with the opportunity to correct some problems with the original contracts.

Johns Manville’s first step in the process was internal. Rideout penned a two page list of outsourcing guidelines outlining in black and white everything that he wanted to accomplish in the outsourcing relationships. This document became the map to keep the discourse on course.

The first contract to come under review was with its U.S. mainframe outsourcer. Johns Manville had one year left on this contract. The supplier actually suggested a new contract because it wanted to negotiate a multiple year deal. The supplier wanted to lock in a set rate for a four year term.

The first topic was accountability. Service levels were unclear in the original contract. And the penalties for non-performance were inadequate. “Our experience is, the provider pays more attention when there are appropriate penalties associated with non-delivery,” Rideout reports.

At first the supplier thought Johns Manville wanted to establish service levels because it wanted to earn a discount every month. Rideout assured the negotiating team the company had budgeted for the full amount and that’s what it wanted to pay. “It’s our preference that there are no penalties, because there are no missed service levels,” he told them.

Penalties and Windfalls

In fact, Johns Manville added an upside. If the supplier finds ways to save dollars, Johns Manville will share the windfall with it. Rideout calls this his carrot and his stick.

Performance is based on metrics. Johns Manville wanted to change some of the original benchmarks to higher levels. Then, it added new ones. In fact, the company doubled the number of metrics in the new contract. One metric he added was how many times it took the supplier to correct the same problem. Another was how to handle problems that occurred in the middle of the night. Previously, the supplier had been awakening the wrong people, which was a constant source of irritation.

The third issue was cost. Johns Manville felt it was paying too much given the current market prices. The business environment had changed since the original contract negotiations and the company now wanted a more competitive price.

The second renegotiation was more complicated. This one occurred because Johns Manville acquired a German company that had an existing relationship with an outsourcer. The original contract was now no longer valid because that contract was with a corporate entity that no longer existed.

Your Language or Mine?

The first big issue had nothing to do with service levels or cost. It was language. Johns Manville insisted the new agreement be written in English. The Germans wanted it to remain in their native tongue. They were adamant because the contract clauses conformed to German law. But Rideout would not give in. The new contract is in English.

Language was only one barrier. The other was negotiating style. The Germans just do it differently. Fortunately, Johns Manville had an ace in the hole. One executive with the company Johns Manville purchased had worked with the outsourcing supplier in the past. This man was also fluent in both languages, making him doubly valuable. “If we had to bring in a translator who had no knowledge of the situation, the contract negotiations would have been very difficult,” notes Rideout.

Competitive pressures weren’t a bargaining tool for Rideout in this contract because the acquisition negotiators agreed to do business with this company for a set period of time. Without the luxury of being able to bring someone else in, Rideout couldn’t push for the dramatic price savings he was able to wrangle in the first renegotiation.

But Johns Manville was able to get more and better metrics with penalties. The most important clarification here was what duties were in scope and which were not. In the past, the included services were not specific. So Johns Manville had no idea what its final bill would be every month. Now, it can budget more accurately because it knows what tasks will cost more.

“We told them if they wanted to develop a long term relationship with us, they had to accommodate our needs in this contract. We tried to show them it was in their best interest to help us,” says Rideout.

Competition is a Good Thing

The new contract only spans two years. “Competition is a very good thing,” Rideout says with a smile. Competition allows the customer to seek other bids and compare them with the services they are receiving. “Competition keeps the supplier honest,” Rideout says.

Johns Manville hired Everest Group, Inc. of Dallas, an outsourcing consulting firm, to be its Sherpa through this uncharted territory. Rideout says it’s well worth the cost to hire a consultant. “It’s powerful to have an outside firm who has done this hundreds of times tell you what they’re saying is not quite right,” he says.

While both sides don their boxing gloves during the negotiations, Rideout says you have to hang them up once the ink starts drying on the contract. “You have to go from adversaries to teammates,” he says. The final goal is to make the contract work for both sides.

Lessons from the Outsourcing Primer:

Here are Rideout’s guidelines for contract negotiation:

  • Seek quality service at fair, competitive rates.
  • Build long term relationships but write short term contracts.
  • Pen an agreement that contains detailed service descriptions with adequate metrics for each activity.
  • Make the supplier fully accountable for delivering services and subject to penalties when it misses service levels. Remove ambiguity from service descriptions.
  • Create a mutual understanding of “in scope.”
  • Define a process for out-of-scope requests.
  • Establish monetary consequences for missed service levels.
  • Set clear boundaries between the customer’s responsibilities and the supplier’s responsibilities.

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