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Re-negotiation Triggers |
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Expiration: If the end date of the contract is looming, re-negotiations are driven by the calendar |
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Performance: The client perceives performance failures, lack of responsiveness or instability in the provider’s management or delivery team |
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Economic: The client or provider believes pricing elements are out of line with the current marketplace |
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Events: A significant change on the client side affects operations and requires contract adaptations. That change could be a merger, acquisition, divestiture, re-structuring, bankruptcy, management change or major volume increase or decrease |
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Contractual: Negotiations are built into the contract at certain dates. |
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Critical Negotiation Elements
Elements critical to a successful negotiation are an understanding of the organization’s needs for the new contract, unity of purpose and establishment of a strong team with a broad enterprise perspective.
Success hinges on obtaining the needed internal backing and executive sponsorship, and gaining the support of a broadly defined stakeholder community. Executive support makes it clear to the service provider that the desire to re-negotiate is real and has commitment at the highest levels. Stakeholder support is important because these are the individuals who interact with the service provider and will continue to do so throughout the re-negotiation process.
Using HR outsourcing as an example, the stakeholder community would consist primarily of these individuals and groups:
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Corporate executive team, including the CFO. These are the “customers” of the HR executive and the HR organization |
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Client HR executive, essentially the “buyer” of the provider’s services |
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Retained HR organization, the people who interface directly with the service provider |
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Workforce at large — the end-users of the services provided by the HR organization. This could include retired or divested employees who may still be recipients of some in-scope services |
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Third-party suppliers of HR services. |
A fact-based dialogue with each constituent in the stakeholder community is recommended, to understand how their needs and interests have been addressed by the current contract. It should also involve what they would seek in a re-negotiation and what is acceptable if the ideal outcome proves impractical. By establishing a consensus regarding the organization’s needs, the client comes to the negotiating table with the power of unity behind it.
From Needs to Agreement
With internal consensus achieved, the client should map current and future business requirements to the desired agreement. This should be reflected in the terms and conditions of the contract, scope of work and service levels, pricing and financial models, transition and transformation plans, and means of governance and relationship management.
In the negotiation process, the client can’t help but be influenced by the service provider’s point of view. This is beneficial, because the objective is an agreement that meets the needs of both parties and provides a basis for partnership. However, negotiation should never lead a client to compromise business requirements. Such compromises only set the stage for misalignments and future rounds of re-negotiation.
An effective client-negotiations team will consist of a C-level sponsor, a representative steering committee, a strong and business-savvy functional executive held in high regard by the stakeholder community, credible subject matter experts for each service component, experienced outside advisors and experienced outside counsel. These should be individuals who are truly skilled in the “art of the deal,” who have successfully negotiated agreements of similar scope in the past and who will negotiate on behalf of the entire client organization, not just a specific interest group.
Sourcing advisors and outside counsel contribute to the re-negotiation process and the team in several ways. The advisor provides process discipline, tools and templates for collecting, collating and modeling data. He also brings subject matter expertise around scope, market information, service levels and performance management. An advisor can keep the focus on objective data, rational dialogue, and the process of converging mutually acceptable outcomes.
Outside counsel contributes outsourcing legal experience that parallels the commercial and functional outsourcing capabilities of the advisor. Outsourcing agreements often raise complex and challenging legal issues that in-house counsel cannot properly address.
