Early Contract Renewal

Renegotiating / Renewal of contracts are considered as a win-win scenario for both client and vendor. Considering today’s outsourcing environment, it is not a choice but a necessity. In long term (three years or more) relationships client’s business and technology needs keeps changing. Therefore it is advisable that both sides are flexible enough to modify the agreement over the life of the contract.

Clients view renegotiating / renewal of existing contracts as a highly effective strategy to revise / align scope, pricing and build a mutually beneficial relationship with vendor.

CLIENT CONSIDER FOLLOWING BEFORE RENEGOTIATING / RENEWING CONTRACT

1. Pricing model
• Discrepancy between current market pricing and contract rates
2. Operating model
• How effective is the current delivery model (near shore, offshore, onshore)
• Rate of delivery failure
3. Scope of service
• Meets existing business needs
• Ability to meeting future / revised business needs
4. Quality of service and risk
• Review quality of services / deliverables as per SLA
• Identify risks not covered in SLA
5. Contract terms
• Flexibility provided as per terms mentioned in contract
• List of terms that are no longer relevant
• Incorporating new terms based on lessons learned / industry good practice
6. Will insourcing or switching providers be trading one set of problems for another?

KEY REASON TO RENOGOTIATE / RENEW CONTRACTS

1. Expand / change in scope because of new offering / needs
2. Change / Clarity in pricing
• Fluctuating market conditions that may result in a client paying prices that are higher than current market rates
• Move from time and materials to a fixed-price model or vice versa
• Move to a pricing model that better represents a long-term relationship
• Adjust pricing because of added scope
3. Realign both parties interests and strengthen relationship
4. Technological innovations (such as grid and cloud computing) that may affect the effectiveness of an outsourcing agreement
5. Clarify contract terms
• Regulatory changes (such as new privacy and security policies)
• Clarify some terms, considering the relationship grew deeper and more collaborative than original envisioned
• Restructure contract to allow for continuous growth without having to renegotiate the contract every time
• Establish new billing metrics regarding what constitutes an added resource cost (ARC)
6. Unsatisfactory service levels and quality issues

QUALITIES IN VENDOR THAT TRIGGER EARLY RENEWAL

1. Flexibility
2. Feeling of partnership and One team
3. Honesty / Integrity
4. Customer focus
5. Overall performance

CLIENT ADVANTAGES: RENEGOTIATING / RENEWING

1. Delivery aligned with business needs
2. Avoid new vendor selection process
3. No transition disruptions
4. Delivery challenges are addressed
5. Align cost with the market price
6. Liberty to revise / add new terms in the contract

CLIENT RISKS: MIGRATING TO NEW VENDOR

1. Service disruption
2. Transition costs
3. Loss of knowledgeable resources
4. Complexity in managing multiple providers

About Author:

Tina Nebhnani is consultant and part of Systems Plus Pvt. Ltd. She is a part of consulting team that delivers Sourcing and Vendor Management Office projects. She can be contacted at: tina.n@spluspl.com