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Benchmarking and Contract Renegotiation

How to achieve best value when outsourcing services
By Mick O'Donnell on 17 February 2021

Any major outsourcing decision causes disruption to the business and it can be time consuming and difficult to transition, return to BAU (Business As Usual) and then continue to extract value.

Will the incumbent come to you offering innovation, improved performance and cost reductions?

Most likely not, as doing so would make their life harder and erode their margins. However, both are achievable if the correct partner is selected, in the correct manner, and the contracts are drawn up in a suitable way.

This means selecting the correct provider is not only key to your business, it’s critical. Ensuring your outsourcing agreements offer continuous value for money should be of paramount importance to the levels of service you expect.

But how do you ensure that you are getting best value from your outsourced service provider?

The key to success is ensuring the original selection process includes the key outcomes and mechanisms to manage performance. It’s important that the contractual document contains sufficient detail, whilst including a suitable level of flexibility.

In many cases organisations will accept the supplier’s terms and conditions and SLAs (service level agreements) but these are not tailored to the individual needs of that organisation. Often, they work in favour of the supplier as opposed to enabling the buyer to include clauses such as periodic performance reviews, benchmarking clauses and discounts for length of service.

To this end, and to ensure value for money, contracts should include:

  1. A continuous service improvement metric, combined with annual cost reviews.
  2. These costs reviews should include benchmarking, as the costs of delivering such contracts are reducing year on year.
  3. Depending upon the provider and exact nature of the agreement, there should be a shared saving model that encourages the provider to review.

In the second point above we mention benchmarking. Let’s explore this tactic as a means of ensuring best value for money from your service provider.

What is benchmarking and why is it important?

Benchmarking is the practice of evaluating something against the industry ‘standard’. In this case we are talking about reviewing the service and terms you are receiving from your incumbent provider against what their competitors are offering in the current market.

Benchmarking reduces the price of long-term, ongoing, outsourcing deals and ensures that contracts remain cost-effective and efficient in the fast-paced technological world in which we live.

Using up-to-date market insight to benchmark can save time and money (in costly and lengthy re-tendering processes) and helps to ensure that you are receiving the best value from your current provider.

How to build benchmarking into your outsourced contracts at the point of running the PQQ, RFI, RFP & ITT and contract negotiations

At eXceeding, we recommend that organisations request that a third-party benchmarking clause is built into their contracts as part of the initial contract negotiations.

A third-party benchmark clause is a valuable tool that enables clients to ensure that their outsourcing deals stay competitive as the provider landscape matures and technology advancements drive down ongoing costs. They can also help to control costs, streamline processes and improve service quality, while minimising disputes.

Most large outsourcing contracts should have a benchmarking clause which states that – at some point during the life of the contract – pricing is to be compared to the external marketplace. However, you will not find your potential service provider offering, or even suggesting such clauses as it’s not in their best interest.

The complex world of IT, ICT & Technology outsourcing is a great example of an ever-evolving landscape with continuous changes, so should the method in which you run RFI, RFP, ITT, bid and tenders processes. The inclusion of benchmarking clauses that allow you to periodically compare with your incumbent’s competitors is paramount.

To achieve this seemingly simple goal, firstly you need to ensure that your contract includes provision and also who’s paying for the service. Secondly, you need to outline your process to undertake this activity and, if necessary, how you will subsequently re-negotiate.

Is the practice of benchmarking all about getting the best price?

Often, market comparisons tend to focus purely on pricing, but price is only one aspect of the overall agreement.

The key elements to ensure your benchmarking is fair and accurate are pricing, SLAs, KPIs (key performance indicators), service management and contractual agreements.

So, it is not just about checking that your service provider is offering the best price in the market.

It may be that your incumbent provider is offering you a fair price for the service but that a benchmarking exercise identifies that their competitors are offering more innovative ways of delivering the service which could mean a more efficient service delivery.

It may be that you identify that other providers are offering more opportunity for discounts or additional services as part of their ongoing SLAs, and this is where your provider is not quite offering the best value solution.

The key is to be open and honest with your incumbent provider. Let them know the findings of your benchmarking exercise and collaborate with them as to how best to move forward to ensure best value, and to avoid a – potentially unnecessary – retendering process when the contract renews.

But what if the outcome is that you want to re-negotiate your contract?

So, you have identified that you are not getting best value from your service provider, but your contract has not yet expired. Can you renegotiate?

Businesses are renegotiating outsourcing agreements before expiration more often than ever before. The nature of many agreements entered into previously have tended to be rather rigid.

Client and provider demands are constantly evolving as their businesses demands increase and as such so are IT services and technologies.

eXceeding believe that both client and provider should see contract renegotiation as a fundamental element of their company structure. Indeed, a pattern of contract renegotiation is no longer regarded as a rarity but more as the ‘norm’.

There are always options available to improve on your current provider’s agreement, that they aren’t going to approach you and offer!

Whether it is on cost, performance or service. It is essential to keep pace with technology advancements and maximise your risk management and competitive advantage.

You should exercise control over your contract and be able to communicate swiftly and concisely with your provider to identify and resolve any problem areas, or areas where there is room for improvement. It is all too easy to let contracts just ‘roll on’.

Why not take a fresh look and re-evaluate your contract?

Have you had issues to deal with that should not have arisen if your provider was servicing you proficiently?

Renegotiation of contracts can prove beneficial to all parties concerned, but especially for the client! It can provide an opportunity to improve and enhance aspects of the contract that have proved less than effective, and it opens the door to discuss duration, delivery, management, solutions, technologies and cost.

So how do you approach a contract renegotiation?

Before entering into any outsourcing contract renegotiations with your provider, it is essential to be fully armed with a thorough understanding of your existing contract. You should also have an up-to-date understanding of how the competitive landscape has changed within that time. Maybe you have completed a benchmarking exercise already and have the market insight to present your findings to your incumbent provider?

You must have a renegotiation game plan in place that ensures any issues raised by your provider can be overcome and that the strength of your bargaining position is made clear and utilised fully.

Whilst we believe renegotiation can be beneficial for both client and provider you must ensure that your requirements are presented strongly and concisely and that the provider will be under no misconception from the outset of what you are looking for, how far you are willing to compromise and the revenue loss if an agreement cannot be achieved.

How can eXceeding help to ensure best value from your outsourced contracts?

It is paramount to utilise all leverage to achieve successful renegotiation of your existing contract. eXceeding’s expert procurement consultants will enter renegotiations on your behalf. We are already equipped with sound market data, based on facts and experience, along with a flexible approach and a strategy that would maximise the end results for both your provider and your business.

At eXceeding we employ a large number of category experts who negotiate deals for outsourced solution every day. Whether you’re looking to run a benchmarking exercise to review the market, need advice on contract renegotiation or you are looking for an outsourcing partner to help to run a full retendering process, we can help.

We understand that it’s not always just about getting the best price today. If your business is looking to select an outsourcing partner, why not let eXceeding assist you to select the correct provider for today and tomorrow’s needs, whilst ensuring best value for money service is achieved for the life of the agreement.

Image of BD & Sales Director, Mick O'Donnell

Mick O’Donnell

Mick spent 20+ years working for EDS and HP in the IT and BPO outsourcing industry, solutioning and managing complex Pan-European delivery models. This background has created a real passion for service excellence and delivering solutions that deliver true value.

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