Renegotiating an outsourcing relationship isn’t easy. In many instances your existing service provider may surprise you with an entirely different pricing approach, which may not be to your advantage.
Today, clients expect a strategic relationship or partnership with their providers. A vendor provides an integrated set of functional services, some of which are commodity operations. By integrating its service offerings, the provider adds value beyond the value of the individual services. In a strategic partnership, the client expects to be able to focus on its strengths after handing off major operational responsibilities to the provider. As part of their thinking, clients typically expect cost savings and access to variable capacities.
Meeting these expectations, providers rely on economies of scale and scope, shared resources and best practices. Clients need vendors to adapt their offerings and processes to changing conditions. And vendors need clients to adapt their expectations and behaviors to permit process innovations and service changes.
However, the quick changing face of technology, marketplace realities, strategic or tactical business requirements, and the ever present influence of compliance regulations will influence pricing in subtle and not so subtle ways.
Going into renegotiations with your service provider requires two things: First, you need to understand how current outsourcing services charges were developed by your provider in the first place. Second, you need to have a solid grasp of the components of service that are represented by these charges. Without this information, you’ll find comparing existing pricing to any proposed new pricing similar to steering the Titanic through the North Atlantic on a cold, dark winter’s evening.
Let’s take two recent examples from outsourcing contract renewals and examine how these companies were prevented from signing less-than-optimal deals.
Example 1. Changes in service measurement as a result of technology change.
Company A planned to renegotiate a renewal of its existing outsourcing contract. While there were some bumps in the road with the existing relationship, it wasn’t considering a competitive bidding process. It maintained what it considered adequate records on the current contract and had established a baseline of current contract volumes and costs. The objective was to quickly and with minimum formalities negotiate a renewal of the contract with some performance and cost improvements.
As the renegotiation process unfolded, Company A wanted to validate its current services baseline volumes with the service provider. The vendor validated a number of the baseline services but then advised that some had changed; specifically, where MIPS was the current mainframe measurement, in a soon-to-be-proposed new pricing structure the mainframe measurement would be CPU minutes.
Company A asked the vendor to provide a MIPS-to-CPU-minutes conversion factor that would enable the client to understand and be able to compare the proposed pricing with the existing pricing. Unfortunately, the vendor was slow to respond and claimed that hardware architecture made it difficult to convert. Company A — with assistance — researched this issue and eventually was able to understand and compare the proposed new pricing, which happened to be slightly higher on a comparative basis.
As a result of understanding the change and pricing implications, Company A rigorously negotiated and was able to improve upon the pricing proposal.
Example 2. Decoupling of combined pricing as a result of regulatory change.
Company B entered into early renegotiation of its existing outsourcing relationship. Its service provider was happy to accommodate the opportunity. However, upon receipt of the vendor’s initial pricing scheme, Company B saw that the new server pricing was slightly lower than its current contract and a new item had been added to the pricing schedule: storage.
The Sarbanes-Oxley Act requires that public companies keep more records (such as email messages) and keep them for longer periods of time. Having provided the mail and print servers under the existing contract and recognizing the requirements of SOX, the provider decoupled storage and server pricing in the new price schedule. In addition to decoupling the pricing, the amount of estimated storage required was huge. In summary, the server/storage costs were initially higher by about $1 million a year. Worse, Company B couldn’t reconcile the amount of storage that the vendor had recommended as required.
As part of the governance structure recommended for the existing contract, Company B kept and maintained extensive metrics and cost information on the equipment and services currently provided by the vendor. This included storage allocated and used per-server across all servers, email volumes and monthly trends and the appropriate pricing information for these areas. With some assistance the storage volumes were rationalized, and the internal SOX compliance team provided some additional guidance, allowing better projections of storage growth.
With this information Company B negotiated lowered first-year storage requirements, restructured its storage architecture with a resultant lower growth in storage costs initially and yearly thereafter.
Clearly when it comes to pricing in an outsourcing relationship, knowledge is power.