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ALFREDO SAADIT SOURCING CONSULTANT
IT Outsourcing Contracts Renegotiation:
When? Why? How?
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Renegotiation: When?1st. Scenario
“Nothing seems to work in the contract”
2nd, Scenario“Contract no longer meets
requirements”3rd. Scenario
“Contract seems to work fine”
Renegotiation: Why? How? Additional References
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Three scenarios, one of them extremely surprising, recommend the renegotiation of your current IT outsourcing contract.
Each of these scenarios shows distinct motivations and different objectives to be achieved during the renegotiation.
Initially, let us characterize these scenarios through the perception of the buyer organization about how much its expectations are being (or not being) met.
Renegotiation: When ? (1 of 2)
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1st. Scenario Nothing seems to work in the contract
2nd. Scenario Contract no longer meets requirements
3rd. Scenario (surprising ! !) Contract seems to work fine
Let us discuss each of the proposed scenarios, taking into consideration their characteristics, the root causes that motivated their appearance and the objectives to be pursued during the renegotiation.
Renegotiation: When ? (2 of 2)
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1st. Scenario Characteristics Projected cost reductions do not show
up.
Provider performance is below (sometimes much below) expectancies.
Relationship buyer-provider shows an intolerable degree of attrition.
Business operations of the buyer organization are negatively impacted.
Users’ satisfaction is progressively deteriorating.
Renegotiation: Why ? How ? (1 of 4)“Nothing seems to work in the contract”
1st. Scenario
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An unskilled negotiation of contractual terms and conditions.
An inadequate services transition.
A weak or non-existent contract governance process.
1st. Scenario Root CausesThe appearance of this scenario is usually associated to
failures during the IT outsourcing project implementation, as follows:
A bad definition of the outsourcing decision drivers.
An ambiguous and inconsistent selection of provider(s).
Renegotiation: Why ? How ? (2 of 4)“Nothing seems to work in the contract”
1st. Scenario
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Contract cancellation and the subsequent resumption of the service by the buyer or its transfer to another provider.
Contract continuation through the renegotiation of the contract terms and conditions aiming at fixing once and for all the problems identified.
Renegotiation Objectives of 1st. Scenario (1 of 2)
As a consequence of the deep contract maladjustment, two alternatives can be pursued during the renegotiation process:
Renegotiation: Why ? How ? (3 of 4)“Nothing seems to work in the contract”
1st. Scenario
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Naturally, a pre-requisite to the achievement of an efficient and effective renegotiation is
that lessons have been learned from all failures incurred during the initial IT outsourcing adoption process.
As a result, each step of process must now be appropriately exercised.
Renegotiation: Why ? How ? (4 of 4)“Nothing seems to work in the contract”
1st. ScenarioRenegotiation Objectives of 1st. Scenario (2 of 2)
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Buyer organization feels captive of a contract that still has a long remaining period (for instance, only 4 years elapsed of an agreed 10-year contract) with no clear perspective on how to adjust its terms to a new market dynamics.
2nd. Scenario Characteristics Contract operations are reasonably efficient if we consider
the contractual terms and conditions agreed in the contract signature.
Effectiveness of business results achieved shows a decreasing trend because the agreed contractual terms no longer support the mutant requirements of the buyer organization.
Renegotiation: Why ? How ? (1 of 5)“Contract no longer meets requirements ”
2nd. Scenario
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2nd. Scenario Root CausesThe materialization of this scenario is commonly
associated:
o To the rigid contractual terms and conditions that do not allow some clauses to be rehashed aiming at supporting the new requirements of the buyer.
o To the increasing speed of the adoption of the so-
called digital disruption and its deep effect over the business requirements of the buyer organization, through the use of the new technologies such as cloud computing, big data analytics, internet of things, mobile apps, etc.
Renegotiation: Why ? How ? (2 of 5)“Contract no longer meets requirements ”
2nd. Scenario
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Renegotiation Objectives of 2nd. Scenario (1 of 3)
The renegotiation effort should concentrate on reviewing some contractual clauses, or creating new ones, which can bring more flexibility to the contract, such as:
1. Contract scope clauses that will reflect the new requirements demanded and eliminating those which have become obsolete
Renegotiation: Why ? How ? (3 of 5)“Contract no longer meets requirements ”
2nd. Scenario
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Renegotiation Objectives of 2nd. Scenario (2 of 3)
2. Quality indicators clauses concerning the new service items created and eliminating those concerning the abandoned service items
3. Additional clauses to assure the future demands may be discussed without impacting the day-to-day operations of the contract, including those concerning the adoption of new emerging technologies
Renegotiation: Why ? How ? (4 of 5)“Contract no longer meets requirements ”
2nd. Scenario
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Renegotiation Objectives of 2nd. Scenario (3 of 3)
In order to achieve such objectives, it is vital that the contract negotiation process be somewhat refined.
The former process, as we can infer from the adequate current contract operations, was reasonably implemented, at least if we consider the original contractual agreed terms.
Such refinement must focus, as we stated above, on the clauses concerning the agile and permanent fulfillment of new requirements.
Renegotiation: Why ? How ? (5 of 5)“Contract no longer meets requirements ”
2nd. Scenario
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3rd. Scenario Characteristics
Contract operations show an adequate level of efficiency concerning the services provided and the contractual terms agreed
Contract operations show an adequate level of effectiveness and flexibility concerning the dynamic requirements of business operations of the buyer organization
Renegotiation: Why ? How ? (1 of 6)“Contract seems to work fine”
3rd. Scenario
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3rd. Scenario Root Causes
There is only one simple and straight reason that results in an adjusted contract (both in terms of efficiency as well as effectiveness): the implementation according to the best practices of each of the steps of the IT outsourcing adoption process, from the definition of the business drivers through the contract governance.
However, the reader of this article will probably
have one question: why a renegotiation is recommended here if the 3rd scenario seems to be so perfect?
The answer will be seen in the next slides.
Renegotiation: Why ? How ? (2 of 6)“Contract seems to work fine”
3rd. Scenario
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Renegotiation Objectives of 3rd. Scenario (1 of 4)
First, there is no scenario that could be called perfect. Any scenario can be improved in some way and such improvement may be achieved through a renegotiation that will lead to still better and bigger outcomes to both parties.
But ... this is NOT the main reason that should motivate the renegotiation.
This scenario is unique because it may lead to
a renegotiation that can simultaneously benefit both the buyer and the provider organizations. Are you surprised? Let us see.
Renegotiation: Why ? How ? (3 of 6)“Contract seems to work fine”
3rd. Scenario
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Renegotiation Objectives of 3rd. Scenario (2 of 4)
o If we consider the provider’s viewpoint, the main objective of a renegotiation in this scenario will be the postponement of the contract termination date, ensuring additional revenue during a period of time to be agreed.
o For instance, let us imagine that in a 10-year IT outsourcing contract, only 3 years are left until the termination date. A 5-year extension would turn the remaining contract period from 3 years to 8 years, resulting in a 167% increase of the future planned revenue.
o Let us bring in some numbers to clarify the financial consequences of such renegotiation. Suppose that the monthly revenue of the contract is US$ 2 million. Such renegotiation would generate US$ 120 million of additional revenue to be charged to the buyer organization during the 60-months extended period.
Renegotiation: Why ? How ? (4 of 6)“Contract seems to work fine”
3rd. Scenario
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Renegotiation Objectives of 3rd. Scenario (3 of 4)
o If we consider the buyer’s viewpoint, the main objective of a renegotiation in this scenario will be to get a discount on the current prices of the contract.
o Back to our hypothetical example: let us suppose that, as a compensation for the 5-year extension, the parties agree a 10% price decrease to be effective immediately and valid during the remaining 8 years (that is, not only during the 5-year extended period) of the contract lifetime. That is, the US$ 2 million monthly invoice will now be a US$ 1.8 million invoice.
o Thus, the accumulated decrease along the 3 remaining years of the current contract would be US$ 7.2 million (= 36 months x US$ 200,000). Moreover, after agreeing this 10% reduction, the provider will relinquish US$ 12 million along the 5 additional years of the renegotiated term, as it gets US$ 108 million of additional revenue and not US$ 120 million, as the previous item had stated.
Renegotiation: Why ? How ? (5 of 6)“Contract seems to work fine”
3rd. Scenario
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Renegotiation Objectives of 3rd. Scenario (4 of 4)
o Anyway, it is now clear that from the contract renegotiation a mutual benefit to both parties may result. And, by the way, it must be obviously noticed that the agreed 10% price reduction will be made effective without any loss of the quality indicators originally agreed in the contract.
o Furthermore, the parties should seize the opportunity brought by the renegotiation to revise and agree some improvements in the contractual processes, aiming at achieving an even higher degree of efficiency and effectiveness in the contract operations, deepening the positive characteristics of the so-called 3rd. scenario.
Renegotiation: Why ? How ? (6 of 6)“Contract seems to work fine”
3rd. Scenario
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Additional References (1 of 3)
Other presentations address many complementary aspects of this theme
All of them were published on SlideShare
See their links on the next two slides
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Additional References (2 of 3)
IT Outsourcing: Frustrating Results? What Went Wrong?
Crisis in IT Outsourcing Contracts: How to Solve it ... and what you Should Have Done Earlier
How Important are the HR teams in an IT Outsourcing Project?
Bad News on IT Outsourcing Risks: If not Treated, Their Effects are Cumulative
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IT Outsourcing Contracts: Heaven or Hell? You choose
IT Outsourcing Contracts: Relationship between Parties
IT Outsourcing: The Unreasonable Strategy of Traditional Providers
IT Outsourcing Revisited: Providers Should Change their Attitude or else...
Additional References (3 of 3)
