The best outsourcing agreements today are “future-proofed.” Built into them are the change-management tools that adjust the agreement to the changing circumstances of both client and service provider. But, as any longtime observer of the outsourcing scene knows, it wasn’t always this way.

Agreements created 10 years ago — or even as recently as three years ago — were for all practical purposes conceived in another era. Now, as these legacy agreements are coming due for re-negotiation, the old is coming face-to-face with the new. These re-negotiations are pivotal in determining the future of important relationships for both clients and service providers, and can be highly successful if approached and carried out properly.

Why re-negotiation? Its purpose is to bring a Business Process Outsourcing (BPO) or Information Technology Outsourcing (ITO) arrangement back into alignment with the client’s changing needs, with evolving market practices, and with current market pricing. Too often it has been a painful process, although it doesn’t have to be. It can be mutually beneficial and positive, as long as the client and service provider each come to the table prepared for a facts-based discussion and with respect for each others needs and economic imperatives.

It is the client who typically initiates re-negotiation, in some instances, out of a belief that the service provider is underperforming relative to expectations. A re-negotiation may also be driven by a client who feels the value of the services has diverged from what other providers (the market) would deliver if the arrangement was re-opened to competition. Additionally, clients may feel their service needs — in scope and/or volume — have changed in ways that their current agreements don’t accommodate. Or the agreement may simply be approaching expiration or a preplanned break point.

If re-negotiation is driven by a perception of reduced value, this may have everything — or nothing — to do with the actual performance of the service provider. There is a disconnect on the client side regarding the high-level reason for undertaking outsourcing. Top executives may have expected best-in-class performance or re-allocation of resources to achieve high-level goals, while those on the front lines may have expected merely to control costs. In this instance, the higher-level business case would not have been translated properly into the specifics of the outsourcing contract. Of all the re-negotiation triggers, the most common is reaction to the approaching expiration of an agreement. Yet, re-negotiations are far more likely to be successful if clients enter into them proactively and with enough time to prepare. That preparation requires a full understanding of all the business elements involved.

Being reactive prevents a client from being in proper control of the circumstances surrounding the re-negotiation. Too much pressure is brought to bear on completing discussions before the contract expires. This results in the client either forcing an outcome that leaves the service provider dissatisfied or accepting compromises that eventually become unpalatable.

Prenegotiation Analysis

Before a re-negotiation, the client should thoroughly analyze the relevance and maturity of the current contract and develop a detailed sourcing strategy. The process should be free of time pressures. This proactive approach, while all too rare, is far more likely to bring a mutually beneficial approach to the entire re-negotiation process and produce an outcome that rewards both the client and the service provider.

Several questions need to be asked and answered in preparation for any re-negotiation and sourcing strategy re-alignment, including:

Negotiations rarely deliver the ideal outcome that either party might anticipate, so it is wise to define success not as a single objective, but as a desirable range of outcomes.

The client should understand its relative priorities and be willing to modify positions on less critical items in order to achieve those priorities. The client should also have a fully formulated fallback sourcing strategy in case the re-negotiation should fail. Most re-negotiations permit at least a short-term extension of the agreement, and if re-negotiation has been approached proactively, there should still be ample time to execute an alternative sourcing strategy.