By Dan Berthiaume
Renegotiation of BPO contracts before the end of their term has become common enough in recent years for many industry observers to consider contract renegotiation a core BPO competency for both providers and buyers. According to “Identify Your Leverage in Outsourcing Contract Negotiations,” a recent white paper from outsourcing consulting firm Alsbridge, a majority of BPO buyers probably have issues that warrant contract renegotiation, and they must learn to identify them and then discover their renegotiation leverage points.
2 in 3 BPO Contracts Have Issues
Based on responses to questions asked of BPO buyers and providers during Alsbridge webinars conducted in 2010, two in three (66%) BPO contracts have “pressing” issues. These include a deteriorating relationship (36%), increasing cost of services (22%), and a need to benchmark (8%). While 50% of respondents with issues were attempting to handle these issues through governance, 29% were using contract renegotiation. Another 15% were requesting changes in provider or staffing and 6% were planning to insource shared services.
Identifying Leverage Points
Assuming a BPO provider is experiencing these or other problems and has come to the conclusion simple governance or staff replacement will not solve them, Alsbridge advises them to identify their renegotiation leverage points and develop a cohesive strategy before pursuing contract renegotiation with a provider. Alsbridge has divided the most common leverage points into two categories: punitive “sticks” and “carrots” that offer additional areas of opportunity for the provider to meet expectations. Following are brief summaries of the potential carrots and sticks identified by Alsbridge.
Leverage Points – The Sticks
Termination for Cause – A BPO buyer should examine the “termination for cause” portion of their contract to see if any provider issues qualify as events that allow termination for cause. If so, the buyer’s legal team should help create a formal communication notifying the provider of breach of contract. Alsbridge recommends the threat of termination is best used as a leverage point to renegotiate an existing contract and leaving a contract is only advisable when all other options have been exhausted.
Termination for Convenience – BPO buyers can often identify specific “towers” of service that can be eliminated for convenience, although a high fee is often associated with this option.
In-process Agreements – Many new services that are outside the core services specified in an agreement can become prime leverage points, as unless a contract has specific language requiring the buyer to use the provider for “like” services they can most likely be shifted in-house or to another provider.
Price Benchmarks – BPO contracts often contain provisions allowing a third party to benchmark pricing and corresponding services. Large gaps may trigger automatic renegotiations, and Alsbridge says even having benchmarking data is often enough to obtain contract concessions from a provider.
Change in Business Conditions – Most BPO contracts provide some ability to renegotiate when substantial changes occur in the buyer’s or provider’s conditions. These conditions vary but often include events such as changes in ownership, CEO, size, financial status or regulatory requirements. If any of these changes have taken place, the buyer obtains significant leverage in renegotiations.
Referenceability – Threats to withhold or provide negative reference can hold substantial weight, although Alsbridge warns negative publicity from a poor BPO relationship can also tarnish the reputation of the buyer.
Leverage Points – The Carrots
Potential for Additional Scope and Term – The possibility for a provider to add services and/or years to an existing contract allows them to obtain potentially millions of dollars in extra revenue without extra investments in marketing and sales. This is powerful incentive to renegotiate a contract that includes more favorable terms for the buyer.
Change in Delivery Model – By altering a provider’s delivery model to include features such as offshoring or automation, the buyer can obtain a lower cost without switching providers, and the provider also lowers the cost of delivery.
Clarification of Responsibilities – A vague BPO contract may leave the provider adding unplanned additional staff, tools or processes. Renegotiations can help clarify provider responsibilities and remove some of these costs while also providing more benefit to the buyer.
In all cases, Alsbridge reminds the buyer that changing provider should be seen as a final option and only in the most extreme cases of contracts breach. Even if sticks need to be used, generally renegotiating a contract is preferable to signing a new contract with a new provider.