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When Should You Begin to Prepare for the End of an Outsourcing Contract?

Hint: 12 Months Out is TOO Late

When should you start working on your next outsourcing contract? Many organizations do not address the end of a contract until the last year of its term. The notification period in the contract, typically 6-to-12 months, usually triggers this discussion.

However I believe this is a mistake. Developing an end-of-term strategy for an outsourcing relationship is a complex task, because it is about much more than the contract.

And the planning and effort involved is just as much, if not more, as the original outsourcing scope since you are now also including the complexities from the current outsourcing relationship as well as the market changes and internal learnings.

The approach that organizations take to address the next evolution of their outsourcing contracts and relationships should be based on adjusting to the constant changes in their businesses and the service delivery offerings that are available to address those needs.

This industry is not new to change, but never before has it experienced the number and magnitude of changes we have seen over the last decade.

Developing an end-of-term strategy

Organizations experiencing an end-of-term event in the next 18-to-24 months must develop a detailed strategy that addresses not only the pending contract expiration but the internal and external pressures as well. They must complete an analysis to determine the correct direction. Some of the changes organizations face include:

Internal

  • Changing business direction
  • Cost reduction requirements
  • Access to new technology
  • Change in service requirements
  • Support of M&A activities
  • Performance of current partner

External

  • Introduction of disruptive technologies
  • Consolidation of suppliers
  • Changing options for service locations
  • Increase geopolitical risk
  • Regulatory changes
  • Entrants of new service providers

External changes: The continual growth and expansion of technology across the globe has created a global infrastructure that continually increases the footprint of service delivery locations options for outsourcing service providers. This has fostered the introduction of highly-skilled and cost-effective labor, which has been a game changer in the outsourcing industry. This change has not only driven how service providers develop their offerings but also how buyers of the services want to consume them.

Internal pressures: Internal changes continue to drive pressures within organizations that impact what and how they procure outsourcing services. The fluctuating economy is requiring many organizations to move to a highly-variable model supporting both internal and external users. This flexible demand management model has changed how organizations look at services both in terms of what and how they procure them from the suppliers.

The pending end-of-term is often a catalyst forcing organizations to look deeply at the:

  • Performance of the current supplier
  • Cost-effectiveness of the relationship
  • Competitiveness of the solution
  • Alignment of services to requirement
  • Target operating model for the next contract term (typically five years)
  • Desired delivery model

Most organizations’ end-of-term strategy is to use a competitive procurement process to address their end-of-term event. Recompeting the services is significant as the switching cost from one supplier to another is often five-to-seven percent of the total contract value.

The key to success: start two years out

The key to successfully addressing an end-of-term event is to start developing the strategy early enough to address all the factors, both internal and external, that will impact the strategy. The window within an outsourcing agreement to develop this strategy is 24-to-30 months before the end of contract.

Why? There are various scenarios companies need to explore as a result of the current strategy these may lead to varying paths. For example, should the strategy be to restructure the existing relationship with the incumbent supplier? What if that renegotiation does not yield the desired results? The buyer now needs time to execute a market RFP for some or all of the services.

Too many organizations look at the end of contract as just a pricing exercise when it is really how an organization can realign the services it is currently receiving with its new requirements. That may be the time to continue to receive services from the incumbent as well as add new ones now available in the market. Only a proper assessment that is not rushed can determine the proper strategy.

 

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