Scenario A: Your organization has entered into an outsourcing contract. After a long and arduous transition process, things have settled down and everything appears to be going fine. Time rolls by and you suddenly find yourself at the end of the term. Should you renew the contract as-is or should you renegotiate the contract or even re-compete? Scenario B: Your organization has entered into an outsourcing contract. After a quick transition period, things have not fully worked to your expectations. The team is still trying to resolve problems and there is a certain degree of frustration on both sides. You now find yourself at the end of the term. You don’t want to go through another transition. What should you do?

The above-mentioned situations are just two of the many possible. Even in these scenarios, there are multiple options.

Organizations often miss out on the opportunities an end-of-contract term offers to improve operational and commercial arrangements in an outsourcing relationship. This may be due buyers’ lack of understanding of the market opportunities, their belief they are being constrained, fatigue from previous negotiation and transition, and the desire to avoid another arduous process. Many times, it is a result of the individuals not being comfortable with negotiations. Some perceive negotiations as counter-productive to developing a good long-term supplier relationship, while others give themselves inadequate time to perform a complete due diligence of the options and execute a well-thought-out strategy.

For many, this could mean placing themselves at a serious disadvantage when their service contract reaches its term.

What is an end-of-term strategy?

An end-of-term strategy (ETS) is a strategic plan to:

• Address the future business needs
• Ensure that the outsourcing relationship continues to be market comparable
• Ensure business continuity and avoid service degradation
• Revise and reduce business risks that may have built up over time when an existing outsourcing services contract comes to an end

An organization having an outsourcing contract must determine the right course of action to ensure that it is in no way in a disadvantageous situation at the end of the contract term.

An organization has multiple choices (I call them the five R’s): renew, renegotiate, restructure, re-compete, and repatriate. Not all of these may be appropriate in a particular situation. Each option has serious implications in terms of effort, cost, and long-term effects. Determining the right approach requires a significant amount of due diligence, planning, coordination, and preparation.

Having a well-thought-out end-of-term strategy in place and successfully executing it enables an organization to leverage market opportunities, correct prior limitations, re-align with business objectives and goals, and strengthen and maximize the value from a relationship.

Why do you need an ETS?

Long-term contracts, however good they are at the time of signing, become outdated. There are a number of key drivers that necessitate the need to review and restructure contracts at end of term, if not prior to end of term.

Business-driven changes. As business grows, there may be new requirements that the existing contracts may not adequately serve. Conditions existing when the buyers signed the original contract may no longer exist or be relevant. The demand-supply equation keeps changing over time. Requirements to stay competitive in the marketplace could change; new technology as well as regulatory changes may dictate how buyers have to run their businesses. The service levels that buyers considered acceptable a few years ago may not be market comparable today. Buyers may require new services along with a new approach to measuring success.

The existing contract may be inflexible and does not support changing business needs. If the contract is rigid and change orders are required every time an organization requests a change, it may not be conducive to long term-partnership. Such situations may call for renegotiation and contract restructuring.

Supplier market-driven changes. Outsourcing is still a growth industry. Improvement in telecom infrastructure and the ready availability of skilled and low-cost labor pools across the globe have created opportunities for offshore services that did not exist five years ago. Outsourcing buyers once considered offshoring; today they consider it mainstream. The maturity of the offshore delivery model has reduced the risks associated with outsourcing and offshoring. The traditional tier-1 suppliers have significantly expanded their global delivery footprint; the India-based suppliers have matured and some have become tier-1 suppliers themselves.

There are a number of new suppliers offering niche services, such as legal services, research services, and clinical research services. These developments in the marketplace offer buyers opportunities to expand the scope of services, reconstruct contracts, leverage offshore, and mitigate concentration risks. An existing contract may constrain an organization from benefiting from these developments. Suppliers often are less motivated to make changes to the contract unless it benefits them directly.

Performance-driven changes. Besides the positive reasons that drive the need for having an end-of-term strategy, there may be other reasons such as the supplier’s inability to perform to expectations, sub-par services, inability to incorporate best practices, or inability to remain current with industry trends. Maybe the supplier lacks the necessary capabilities to provide consistent service in some of the functional areas in scope. Depending on the situation, a buyer may want to restructure, renegotiate, re-compete, or repatriate the services.

Capability-driven changes. The buyer has a global expansion plan. The existing supplier, while providing a high-quality service at the market-comparable price, does not have a global delivery footprint to provide extended services on a global scale, nor does it have a plan that would match the needs of the buyer. The buyer may need to add a new supplier for incremental work or shift the entire portfolio to a new supplier.

Concentration risk-driven changes. A scenario could be that, due to M&A activities on the supplier side, the buyer may have ended up with a significant portion of its outsourced portfolio with a single supplier or to a single geographic region, increasing its concentration risks. The buyer may want to consider reducing its concentration risk.

In each of the above situations, an end-of-a-contract term provides an excellent opportunity to review the sourcing strategy and restructure its contracts so the buyer will be better prepared to meet its business needs.

The cost, effort, and potential risks of transitioning from one supplier to another or even repatriating back in-house are significant. It is vital that organizations give themselves enough time to perform the right amount of internal and external due diligence, and operational, financial, and legal risk analysis to determine the right approach. Often companies underestimate the time and effort required for due diligence and renegotiation, leading to compromises and value dilution.

Mark to market

Organizations having longer-term (greater than five years) outsourcing contracts would be well served by periodically marking their contract to the market. In a high-growth industry, five years is a long time. There may have been significant changes both in terms of supplier base and service-delivery capabilities. Organizations need to periodically mark their contract to market, even if the contract is not up for renewal within the next three years. Business competitors may be entering into contracts that are more current and relevant.

Having a market-comparable outsourcing contract helps to remain competitive. Some of the questions buyers should answer are:

• How does the relationship and contractual arrangement compare with more recent trends in the marketplace?
• Is the contract still relevant and supportive of the business needs?
• Is the supplier able to deliver to your changing business needs?
• Is the supplier continuing to deliver the value as promised?
• Have changes in the marketplace impacted your supplier’s ability to deliver?
• Have the service levels stayed current with the market?

Based on the answers to these questions, the organization may need to revisit the contract well in advance of its natural term. Periodic mark to market of the contract will help shape the end-of-term strategy.

Renegotiation

Negotiations are not easy and individuals prefer to avoid them. Management may have other priorities that keep them away from finding the time to think about the contract until it is closer to termination date. Suppliers prefer to avoid the end-of-term or renegotiation conversations unless they have a need to drive the changes into the contract. A significant percentage of companies re-contract with the existing suppliers, often to similar or worse terms and conditions compared to the original contract. This is primarily a result of suppliers being better informed and prepared to leverage the buyer situations.

Some individuals may believe that it is not in the spirit of partnership, while others may believe they have the best deal. Suppliers typically support and fuel this belief by stating how tough it is for them. Suppliers occasionally offer a token discount to re-contract to avoid having to go through a renegotiation process.

Time is a critical factor in these situations. The more delayed the start of negotiations, the less power the buyer has to renegotiate.

Renegotiation does not mean spending an inordinate amount of time rehashing everything. It is not about redoing or breaking what is good and works well. It is about improving what isn’t. It is about realigning a contract based on business objectives and future needs.

Companies that are market savvy proactively review the marketplace for opportunities and actively engage in renegotiation. These companies often distinguish themselves in the competitive marketplace.

Developing an ETS

The ETS roadmap would typically consist of the several decision points. It requires informed decision making, taking into consideration strategic goals and objectives. The process of strategy development starts with a review of internal business need. This should be an ongoing process. Buyers should incorporate minor changes into the existing contract and earmark major changes for renegotiation.

While it is essential that buyers review the change in services needed with the existing supplier, it is beneficial to evaluate the need with alternative suppliers. This provides opportunity to perform a comparative assessment of the solution. Being informed and educated about the options provides a significant advantage while renegotiating the contract. It helps develop what the industry calls BATNA ? Best Alternative to Negotiated Agreement. Knowing BATNA will enable you to evaluate the options.

Developing an ETS will require assessment of five key elements:

1. Supplier performance
2. Future business needs
3. Supplier capabilities
4. Supplier plans
5. Industry trends

Buyers must objectively assess supplier performance and capabilities. This is often a challenge, as parties involved may have a siloed view of the situation. Organizations must conduct the evaluation in absolute and relative terms: absolute with reference to the needs and relative in comparison with the industry. Assessing costs and risks associated with alternatives helps formulate the strategy.

When do you start?

Organizations often make these two errors:

1. Assume a contract will last its entire term
2. Do not start work on an end-of-term strategy until late into the contract

Ideally, preparation for end-of-term must start at the time the two parties construct the original contract. Organizations must address the termination event, which most contracts do. Contracts have clauses that provide flexibility to extend a contract, some degree of price protection, termination assistance services, residual rights and licenses, etc. These help establish a starting point for development of the strategy. The key is to provide adequate time to execute the strategy in the worst-case scenario of having to re-compete or repatriate the services without running out of time to transition the work out from the current supplier.

Even a simple renegotiation of a contract requires a significant amount of preparatory work. Negotiations are successful when one is fully informed of the possibilities, options, risks, and benefits.

In case renegotiation does not work or is not the right choice, an organization needs to have time to engage in an RFP process with alternate suppliers. This also means having the time to transition work to the new supplier. In a scenario where the best option from a business risk standpoint is repatriation, the organization will need time to recruit, redeploy, and train to be able to take on the work.

The goal should be to have a signed contract at least three months prior to expiration of the existing contract or be in a position to repatriate the work back in house within the termination assistance period.

Organizations often underestimate the time and effort required to strategize, plan, and manage for end-of-term; often this leads to a time-forced decision, resulting in major compromises. This could mean a significant leakage in value. Having time on your side is a great advantage in any negotiation. It is never too early to start developing an end-of-term strategy.