During the next few years, over US$110 billion worth of outsourcing agreements will be up for renewal, and billions more will be subject to mid-term re-negotiation. Examining the key market drivers behind the current rise in re-structurings and the factors that prompt contracts to be re-negotiated will shed some light on this occurrence. Clients must consider the multitude of options and opportunities that exist when re-structuring outsourcing arrangements or as current contracts come to term. In either set of circumstances, the aim is to give clients a better chance at success the second time around.

Current State of Re-structurings

Last year witnessed an unprecedented volume of contract re-structurings, representing almost a quarter of the total contract value awarded globally in the broader commercial outsourcing market — contracts worth more than US$50 million. This compares with a historical average of just 15%. Both the volume and the value of re-structurings in 2005 (more than US$18 billion) were all-time highs.

All indicators point to more re-structurings ahead. Indeed, re-structurings accounted for more than 40% of all contracts signed in this marketplace during the first quarter of 2006.

The industry is entering a period in which it will see a heightened volume of first-generation agreements being re-structured. Industrywide, there are some 315 transactions, originally valued at more than US$92 billion, which will reach their contracted end dates during 2006 and 2007. These 315 transactions represent more than a fifth of the active outsourcing agreements in the industry today.

Many contracts are also re-structured during their initial terms. Dynamic business conditions often force re-structuring of large outsourcing deals within 18–36 months. Clients want to be able to adjust quickly to significant changes in their own business and marketplace.

Factors Driving Re-structurings

After experiencing first generation or even second generation outsourcing deals, companies feel more comfortable about breaking their sourcing approach up into smaller pieces handled by a number of best-of-breed service providers. Multisourcing allows clients to leverage multiple service provider capabilities, deploying the best of each service provider’s core competencies. Multisourcing also keeps the cost of service delivery at market-competitive levels. Companies must, however, ensure that they are able to handle this new level of complexity by having adequate governance and relationship management arrangements in place.

Clients are also looking for more options when it comes to offshore service delivery. The growth of Global Service Delivery (GSD) or offshore outsourcing is undeniable, and this growth is expanding to encompass multiple operational models, a greater number of countries, a broader and deeper range of outsourcing activities and much more competition in the form of diverse service providers offering improved capabilities.

In addition, clients want improved access to service provider creativity, innovation and best practices. A large number of the contracts approaching renewal are with large, full-service line, multinational service providers. These enterprises have the capabilities and technologies at hand not only to deliver an efficient and effective operational service, but also to fully support a client’s strategic agenda. However, many outsourcing clients have found that in past contracts they have been delivered a rather “siloed” approach and that their service provider did not leverage its considerable resources and expertise to its benefit. Many buy-side companies are, therefore, now considering re-structuring their contracts in order to gain better access to and benefit from such assets.

These drivers all center on the client’s desire to benefit from advances in the sourcing market. Clients also look to re-structurings as a means of increasing their options, flexibility and control within their sourcing relationships. For some clients, re-structurings are driven by a desire to eliminate that “locked-in feeling” and improve long-term manageability by re-establishing a “normal client” relationship, where the continuation of the contract is a free choice at the client’s discretion.