End-of-Contract Sourcing Options

By Geraldine Fox

Over the next few years, billions of dollars worth of outsourcing contracts are up for renewal, leaving client organizations with a difficult decision to make: Should they renew their contract with the existing service provider? Cut their ties with the incumbent and embark on a clean-slate search? Or should they simply take services back in-house?

Each course of action is appropriate under certain circumstances, and each involves potential risks and rewards. The decision process should begin 18 to 24 months before the contract expires, and should evaluate and address all relevant issues before a determination is reached.

Renew the Contract?

If the client/outsourcer relationship is characterized by mistrust and resentment, constant friction, and disagreement, then renewal will most likely result in continued disappointment. Trust, once lost, is rarely recovered; lower charges, or vague promises of better service in the future, ring hollow. The problem often comes down to a bad cultural fit, in which case its best to learn your lessons and move on, rather than to try to rebuild a seriously flawed relationship.

However, if the parties have established a good relationship, characterized by trust, renewal is a low-risk proposition. Issues such as perceived overcharging for services, or disappointing service delivery, can be sorted out during renegotiation.

Clients seeking to renew their existing contract should do the following:

• Identify the impediments to success in the existing deal through an overall assessment of the governance relationship to determine how the cause of the problems can be addressed during negotiations
• Determine the scope of services and responsibilities to outsource and those to take back in-house. Often, the client has already absorbed some responsibilities over the contract term. Now is a good opportunity to make this official
• 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

Re-Bid Through an RFP?

If an RFP is issued and the incumbent vendor participates in the process, several complications may occur. For one thing, other vendors may assume that their bids will be used to achieve a lower price with the incumbent. Clients must therefore assure new bidders that the process will be fair, and be prepared to invest in educating them about their environment and requirements. And while its true that the incumbent has a competitive edge by virtue of extensive knowledge of the clients operation, an incumbent vendor that expects to lose the contract may be uncooperative in sharing information and allowing access to other vendors. Finally, the competition may deliberately underbid to oust the incumbent, in hopes of winning the business.

The key issue for the client organization in the complex re-bid scenario is control. This consists of access to critical information and the support of an internal and external team of experts to execute and manage the outsourcing process.

Clients who dont control their data and information risk being placed at the mercy of the incumbent vendor. One approach to gaining access to the data and information required to issue an RFP is to execute the contract benchmarking clause in the contract and allow a third-party to gather the required information.

Repatriate Bring Services Back In House?

Organizations that take this path are generally dissatisfied with the performance of the incumbent vendor, disillusioned about outsourcing in general, pursuing aggressive cost savings or control over their IT budget, have determined that outsourcing does not add value to their operation, or are aware that IT is a core competency and instrumental to their overall operation.

Although rare, large-scale insourcing will likely become more common over the next few years, despite the challenges. Compass data shows that organizations have been quietly insourcing selective areas for years.

Client organizations shouldnt underestimate the challenge of justifying the business case to executives. In the past, a key driver for outsourcing was to get people off the books and to sell the assets for a cash infusion. Notwithstanding potential savings of 20 percent to 30 percent, making a compelling business case is often difficult, as insourcing will involve increasing the headcount and perhaps purchasing assets. Staff transferred to the incumbent vendor at the outset of the contract may be unwilling to transfer back. Running the new organization as a business is critical.

Some Issues to Consider

An objective, independent appraisal of market costs and management challenges is needed to develop a viable business case to justify the upheaval of repatriation. The rationale must include substantial cost savings and notable increase in quality.

Organizations unhappy with outsourcing might be tempted to repatriate the whole operation once their contract term expires. While insourcing can be an enticing option, its not as easy as it seems, and requires careful planning and execution, a strong business case, and a sympathetic executive willing to undertake significant cost and disruption.

Repatriation should never be a knee-jerk reaction to a bad outsourcing experience, but an outcome of careful analysis. Moreover, a client who thinks the outsourcer is solely to blame for a bad situation is probably wrong, and will likely repeat the same mistakes whether they repatriate, renegotiate with the incumbent, or switch to another vendor.

Geraldine Fox is global leader of Compass Sourcing service line. She is based in Victoria, British Columbia.