Sourcing Inside Out: End of Contract Approaching? Never Too Early to Consider Your Options

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By Geraldine Fox

If your current outsourcing contract is due to expire in the next two years or so, now is the time to start thinking about your options.

First, you can keep doing what you've been doing and renew with the incumbent vendor. Second, you can start fresh, issue an RFP, and find a new supplier. Third, you can decide to do it yourself and bring services back in-house. (A fourth option is to employ a mix of the first three.)

While the options are clear, the issues involved can be complex, and the stakes high. Each approach involves potential risks and benefits. Make sure you consider all sides and that whatever choice you make, you base your decision on a thorough assessment of the situation and your business needs.

Renew the Contract?

If your existing relationship is one of continuing delight, this is a no-brainer – you renew the contract. Similarly, if the situation is hopeless and miserable, you cut your losses and look for a new service provider. The challenge lies in dealing with ambivalence – in evaluating an imperfect relationship and determining whether or not it can or should be salvaged. (Most cases, in other words.) Here, it's critical to assess things honestly and recognize whether you as the client are at least partially to blame for difficulties. (Chances are that will be the case.) If you decide to try to work things out, don't rely on good intentions – make sure you define specific objectives, establish process discipline and ensure management oversight. Some examples:

• Assess the governance framework of the existing relationship to identify problem areas and how they can be addressed.
• Don't be appeased by lower charges or vague promises of better service in the future. The former won't address fundamental problems and the latter won't happen without specifics.
• Review and reassess the scope of services and responsibilities to outsource and those to take in-house. Clients generally take on additional responsibilities over the contract term. Renegotiation is a good time to recognize and account for this.
• Develop a new master services schedule, which fully defines the service offering, maps the responsibilities, and establishes the service delivery targets and reporting.
• Use a third party to develop a ‘Proxy Bid" to fulfill the requirements for a competitive bid situation and to set a fair market price for the services.

Go to RFP?

Developing a request for proposal (RFP), evaluating responses and selecting a vendor is not a task to be undertaken lightly. If, however, you determine that the existing relationship is beyond salvaging, here's a checklist of what you need:

• Control the process. Ensure that you have access to your data and information, and build an internal and external team of experts to execute and manage the outsourcing process. Lacking this control, you risk being at the mercy of the incumbent vendor.
• Consider executing the contract's benchmarking clause and allow a third-party to gather needed information and to set a baseline of where you stand relative to market conditions.
• Make sure you have allocated sufficient resources (money and staff) to manage the re-bid process.
• Be prepared to invest in educating the other vendors about your environment.

If you issue an RFP and invite the incumbent vendor to participate, be prepared to deal with some additional complications. For one thing, other vendors may assume that their bids will be used to achieve a lower price with the incumbent and may decide not to participate. Or, competitors may deliberately underbid to oust the incumbent. Keep in mind that the incumbent has extensive knowledge of your operation and a potential advantage over the competition. Conversely, if your relationship has soured, the incumbent may be uncooperative in sharing information and allowing access to other vendors. Finally, if you invite the incumbent to participate, then be willing to wipe the slate clean and consider new solutions to existing problems.

Bring Services Back In House?

This option is becoming increasingly popular, for a variety of reasons. In some cases, clients are dissatisfied with the performance of the incumbent vendor specifically and disillusioned about outsourcing in general. Other clients have committed to aggressive cost savings targets or control over their IT budget. In some cases, clients have learned from their service providers, and have discovered they've acquired the management skills to run their operations. In others, they have allowed their service providers to do the heavy lifting and fix serious operational problems, and then take over and reap the cost benefits.

If you do decide to insource, don't underestimate the task at hand. Repatriation will involve increasing the headcount and perhaps purchasing assets. Rehiring staff from the vendor may be difficult.

To make it work, you need a viable business case based on a realistic, independent assessment of market costs for personnel and the cost of repatriation. Don't underestimate the disruption and potential upheaval involved. You'll have to demonstrate to the boardroom that the effort is worth it, in terms of cost savings and increase in quality. Consider too that many executives might find a discount offer from a vendor more appealing than undertaking the insourcing process.

Don't repatriate out of frustration with your service provider or as a knee-jerk reaction. It's not as easy as it seems. Moreover, if you think the outsourcer is solely to blame for a bad situation, you're probably wrong. If you haven't addressed the basic problems within your organization, you'll probably repeat past mistakes whether you repatriate, renegotiate with the incumbent or switch to another vendor.

Guidelines for Success

Whatever choice you make, take a big picture view and consider all alternatives. Don't be boxed into any particular course of action without carefully considering all alternatives. Don't assume that renewing with the incumbent is the best option, that another vendor will solve your problems or that you can run things on your own.

Learn from experience and/or mistakes. Be honest and acknowledge that your organization may have contributed to the problems and challenges with the existing relationship. Ask yourself if you clearly defined goals for outsourcing and if you articulated those goals to the vendor. Did your business objectives change as the contract matured? Did you conduct due diligence on the contract before you signed it? Did you appropriately staff your retained function? Chances are, if you go through this assessment you'll recognize that you're at least partially responsible for any problems.

Get a sense of how your current agreement stacks up against the market. Many clients believe their rates are high and that they could find another vendor willing to deliver the same services for less. This is not necessarily true. Although some vendors will respond to RFPs with cut-rate pricing (at least in the first year) to win the business, such deals generally lead to dissatisfaction. If you seek cost reductions, make sure your targets are realistic and based on market conditions.

Get an objective opinion. If a relationship starts off badly, it often settles into a scrappy, contentious, teenage existence and never achieves maturity. A third-party review of the relationship will identify key problem areas that must be addressed, whatever course of action you pursue. Such a review will also help you understand your capabilities and limitations to manage an outsourcing relationship, and to ensure that past mistakes are not rolled over into a new strategy.

Useful Links

Compass
http://www.compassmc.com

About the Author:

Geraldine Fox is Global Director of Compass' Sourcing Service Line. Compass is a global management consulting firm specializing in business and IT performance improvement. Ms. Fox oversees Compass' sourcing database, models and methodology, and works with client organizations on developing and implementing outsourcing management strategies. Contact Geraldine Fox at geraldine.fox (at) compassmc.com or visit http://www.compassmc.com.

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