When driving a hard bargain doesn’t result in a good outsourcing deal

Most of us like to think we can drive a hard bargain, both in our personal and professional lives. And when it comes to negotiating a sophisticated, wide-ranging outsourcing contract in a time of widespread corporate cost-cutting, the ability to hammer out a good price could potentially make or break a career.

So I was interested to see the National Outsourcing Association (NOA) warn last week that the falling price of outsourcing contracts could hamper the success of deals in the longer term.

“With the increased pressure on companies to cut costs, many are pushing through higher volume, low-cost contracts over shorter time frames, which more often than not sets the outsourcing contract up to fail,” said NOA chairman Martyn Hart. Put simply, he added, it is more important than ever that contracts work for both parties and that best practice be followed from the outset.

Some 18 per cent of outsourcing contacts decreased in length over the last 12 months, the NOA found. But during the same period, 20 per cent of respondents said they have seen the value of outsourcing contracts increase, with just 10 per cent claiming they have fallen.

Should companies in that 10 per cent of deals be worried about the deals they’ve forged? Maybe. If the suppliers involved are happy with the price they’ve accepted, then there should be no problem. But if they have been brow-beaten or bullied into agreeing to a deal where profit margins are already wafer-thin, how responsive and flexible are they likely to be when a customer needs to make changes or requires extra service or support?

A better way to look at the negotiation process is to dig down into the fine-grained detail of the proposed contract. No outsourcing contract should come down to one, all-inclusive rate – and any attempt to insist on that with a supplier is likely to stall discussions early on in the proceedings.

In some situations, that might be OK, confirming that a given provider is simply not the right one for your organisation. But given the resources most organisations devote to supplier identification and selection, these failed discussions do come at a cost.

Instead, it makes more sense to list all the aspects of a contract that are open to negotiation and form a position internally on each of them. These could include financial and payment terms; work hours; overtime rates; length of engagement; access to resources; multiple operation benchmarks and guarantees.

Times are hard and many outsourcing customers are looking for a deal, so there’s no harm in spending time evaluating what a supplier’s real bottom line is. But going below that bottom line could seriously backfire on your organisation. Is it really worth it?


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