The contract crossroads

Time to re-let your outsourcing contract? Julia Vowler looks at the options open to you

Time to re-let your outsourcing contract? Julia Vowler looks at the options open to you

Nothing lasts forever, least of all an outsourcing contract. At some point the end of the contract term will loom into sight and decisions will have to be made. Increasingly often, outsourcing contracts will be let with a schedule of flex agreed, where both sides can take stock of changing businessdriversand realign the contract accordingly under a contract management programme.

Atany break point three choices areavailable: continuing with the incumbent outsourcer, re-letting to a new outsourcer or bringing IT delivery back in-house.

Whichever choice is made, it must be made at the highest level. "The strategic review must apply the same degree of seriousness to the issue of outsourcing as was done when the contract was first let," says Robert Morgan, chief executive of sourcing consultancy Morgan Chambers. "It can't be done by junior managers. Ideally it must be done at board level and [be based on] business objectives for at least the next two years."

Conducting the review at top level is not just for the user firm's benefit so it can understand its real requirements. It sends a clear signal to the incumbent outsourcer that the user means business - outsourcers become very used to the endemic grumblings and moanings of clients, but when chief executives get involved outsourcers take notice.

The timing of the review, however, warns Morgan, is critical. Too much warning is dangerous. An outsourcer who feels it has been "written off" will "tune out" of the contract and the relationship can deteriorate rapidly without hope of rescue.

Worse, from the user's point of view, a pre-warned outsourcer believing it is on the way out, will not, warns Morgan, be keen to discourage key outsourced staff with valuable skills to seek assignments on other contracts. So if you do not continue with the incumbent, vital staff and skills may well be missing.

Unless there are specific clauses about retention of key skills and staff in theoriginal outsourcing contract, warns Morgan, staff attrition prior to re-letting a contract "is very hard to prevent".

"Do not tell your outsourcer you are thinking of re-letting until you are legally required to do so," he advises.

Users should also check their exposure in terms of early redemption clauses. Such costs may be extremely steep in "back-end loaded" contracts, where the outsourcer sweetened the deal by charging little in the initial years and aimed to make its real money in the later years. It will, therefore, want a hefty pay-off to leave quietly.

It's all too easy, warns Morgan, "for a client to serve notice and suddenly get a bill for millions of pounds to terminate the contract".

If the bill is so high, and the extrication so difficult, that the user gives in and stays with the incumbent, this is not good news for future relationships.

"The relationship is dead from then on," says Morgan.

Users should not blithely assume that the world is full of outsourcers hungry for their business.

Bidding for outsourcing contracts is very costly. Suppliers only do it if they think they have a serious chance of winning considerable business. "Suppliers can spend £250,000-£500,000 putting a bid together," says Morgan.

They will not do so if they think the request for proposal (RFP) is not genuine, or, worse, is looking for a free benchmark from a rival in order to put pressure on the incumbent. An outsourcer will want to see firm evidence of a commitment to re-letting before responding to the RFP, for example, by a board-led contract review, or a clear change in business environment.

Again, re-signing the incumbent because no one else will take on the work, is not a good situation to be in. Live-in estrangement is worse than divorce.

The bottom line on re-letting is, if you do not have very good reasons to do it, and you do not look like a good business bet for a rival supplier, then do not even think about it. Far better to have a flexible initial contract, prepared with care, by a dedicated management team determined to build a good and mutually beneficial relationship with your outsourcer.

CW360.com and sourcing consultancy Morgan Chambers are currently publishing a major survey and report on Outsourcing in the UK FTSE 100.

Download it free at www.cw360.com/outsourcingreport.

Why users grumble about outsourcers
Sourcing consultancy Morgan Chambers surveyed 138 of its clients, representing 60% of the UK's outsourcing market, and asked them why, if at all, they were dissatisfied with their outsourcer. These were their responses:
  • Loss of control and loss of ability to truly influence the supplier (51% of respondents)


  • Client felt it took too much management time to resolve issues with the outsourcer (37%)


  • Loss of IT expertise by the clients, who felt they had given up their IT expertise and were no longer in control of it (34%)


  • Inability to return the service in-house (32%)


  • Outsourcers were seen as having failed to provide the skills they had promised and which the client had presumed it would get (32%)


  • Client was disappointed with the lack of innovation by the outsourcer (30%)


  • Outsourcer lacked understanding of the client's business drivers and objectives (28%)


  • Slowness of response by outsourcers (25%)



Of companies which were dissatisfied with their outsourcer their intentions were as follows:
  • Completely re-let the contract (38%)


  • Bring IT back in-house (9%)


  • Renew the contract with the incumbent supplier only after strong renegotiation(24%)


  • Resign themselves to renewing the contract with the incumbent as a foregone conclusion (17%)


  • Don't know or won't tell (12%)

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