1/8/2007
The increasing level of sophistication in contracts governing business process outsourcing (BPO)—which includes HR and other internal operations, such as finance/accounting—is producing agreements that are far more flexible and, to a greater extent, "future-proofed."

Such agreements contain important change-management tools that allow flexibility to adjust to changing circumstances of both the client and the service provider.

However, outsourcing agreements created 10, 5 or even 3 years ago and now being renegotiated were essentially conceived in another era. These "legacy agreements" are generally more rigid, which creates the need for renegotiation (to accommodate changing circumstances) rather than renewal. Both clients and service providers are thus challenged to recreate their agreements into fluid, flexible and evolutionary relationships whose very nature will reduce the need for large-scale renegotiations in the future.

If approached and conducted properly, renegotiation of legacy agreements can benefit both parties—enhancing relationships and better aligning the client’s changing needs and the service provider’s operational and economic imperatives.

Proactive vs. Reactive

Of all renegotiation triggers, the most common is the approaching expiration of the agreement. However, renegotiations are far more likely to be successful if clients enter into them proactively and with enough time to prepare. Being reactive keeps the client from being in proper control of the circumstances surrounding the renegotiation, in part, because of the inevitable pressure to engage in and complete the discussions before the contract expires.

Ideally, a renegotiation should be initiated by the client following a thorough analysis of the current contract, early enough to ensure that the process is free of time pressures.

Clients are often reluctant to begin renegotiations earlier than is required to keep the contract from expiring due to the many other demands of operating their businesses. Modern contracts (whether for new business or arising out of renegotiation) that have the tools to accommodate change spread the burden of renegotiation over the life of the agreement, reducing the impact of future expiration dates.

Because negotiations rarely deliver the ideal outcomes that either party might have anticipated – as each party’s understanding of what is possible is modified by their interaction with the other—it is important to define success not as a single objective, but to express it as a desirable range.

To this end, the client should understand its relative priorities and be willing to modify positions on less critical items to achieve those priorities. The client should also have a fully formulated fallback sourcing strategy in the event that the attempted renegotiation is unsuccessful.

Most renegotiations permit at least a short-term extension to the agreement, if not a renewal; and, if renegotiation has been approached proactively, there should still be ample time to execute on an alternative sourcing strategy.

Forging Stakeholder Support

Success hinges on gaining support of a broadly defined stakeholder community.

Executive support will make it clear to the service provider that the need and desire to renegotiate is real and that it has commitment at the highest levels. Support from stakeholders also is important because it is these individuals that interact with the service provider, and will continue to do so throughout the renegotiation process.

Engage in fact-based dialog with each constituent in the stakeholder community to understand how their needs and interests have been addressed by the current contract, how this falls short of what they would seek from any renegotiation, and what would be acceptable should this ideal outcome prove impractical.

By establishing a consensus in regard to the organization’s needs, the client will come to the negotiating table with the power of unity behind it. This also prevents late barriers from arising, such as a key stakeholder’s unexpected objections becoming an obstacle to the agreement.

Assembling the Team

The client also needs to assemble the right team with a broad enterprise perspective.

Actual negotiators should be those who are truly skilled and experienced in the “art of the deal.” They may be internal to the organization, or they may be brought in from outside. They should be people who have successfully negotiated multiple agreements of similar scope in the past, and who will negotiate on behalf of the entire client organization rather than representing a specific interest group.

Initial contacts regarding renegotiation should be between the most senior executives in the respective organizations. In these exchanges, the client should focus on setting a very positive tone, focusing on the desire to create a mutually beneficial outcome that will result in a long-term renewal for the service provider.

Most clients anticipate that the service provider will be hostile to the idea of renegotiation. Yet, a client should be cautioned that such anticipation can be a self-fulfilling prophesy. In most cases, the client’s approach determines the provider’s response, and in anticipating hostility from their service provider they adopt an aggressive posture that provokes the expected response.

If, instead, the client moves to enlist the provider in solving a joint problem and delivering a mutually beneficial outcome, service providers can see renegotiation as an opportunity and will adopt a much more positive attitude.

There are other reasons why a provider should react positively to a request for renegotiation. It:

• Is preferable to negotiating a termination or competing with other providers for an entirely new contract.
• Offers the provider an opportunity to extend the term of the agreement, with the potential for a longer-term revenue commitment.
• Gives the provider an opportunity to address any adverse aspects of the agreement by moving to current market practices where it makes sense.

Modern (Re)negotiations: Bridging the 'Belief Gap'

One common challenge that renegotiation must overcome can be referred to as a “belief gap” between client and service provider. The client may have a perception of dissatisfaction in the user community or with the responsiveness or flexibility of the service provider, or may believe that the relationship has become adversarial.

Often, the service provider may have a completely different perception, believing that it has performed or outperformed the requirements and the client has been making unreasonable demands and does not appreciate the provider’s increasing costs.

Operating on the basis of contradictory beliefs often drives renegotiations that are focused on the emotions of the parties, and typically engender entrenched positions that more often fail.

Successful renegotiations involve both the client and service provider approaching the discussions with the intent to first establish an agreed set of facts. If they collect and agree on the data needed for rational dialogue, they do not need to operate based on beliefs and perceptions. The intent is to forge a common understanding of possible solutions, and then help converge an outcome that is equally acceptable.

“Future-Proofing” the Contract

One major way that modern outsourcing agreements differ from legacy contracts is the tools used to manage and respond to change while maintaining alignment between the parties. These change-management tools, supporting a much more effective and formalized governance function, allow both client and service provider to respond to each small change trigger appropriately as it arises and reposition the relationship and the contractual documents to reflect a modified solution.

A key objective of any renegotiation is to recreate the contract to include such tools and to implement the governance reforms necessary to make them effective so that full-blown renegotiation won’t be needed in the future.

Renegotiation offers a great opportunity for the client and service provider to “get it right” for the future. To give proper attention to the process:

• Conduct a thorough self-examination.
• Build stakeholder consensus.
• Empower a strong negotiating team.
• Engage tier-one outsourcing advisers and outside counsel.
• Adopt a fact-based approach to negotiations.

The proof will be in the long-term results, which should include a refreshed relationship where governance processes operate effectively to continuously maintain alignment between the parties on the scope, performance and price/value of the services delivered.

This article is adapted with permission from EquaTerra , a multi-national outsourcing and insourcing advisory firm.

Stan Lepeak is managing director of research at EquaTerra. Mark H. Robinson is a partner at EquaTerra.