Rethinking the Long Term Sourcing Deal
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Show Me the Money
Before outsourcing, you'd tell your managers to tighten their belts and do more with less. But you can't cut staff and make do with less, because they're not your staff to cut. On top of that, while you’re struggling to control your budget, you have this feeling that your outsource supplier is doing pretty well compared to you.
Your situation is not unique. But what can you do about it?
Understand How Your Needs Have Changed
Suppliers aren't incented to price their services at the lowest possible price, but rather to win the work at the highest possible price. You may have saved money at the time of the deal, but that doesn't mean you couldn't have saved more. Your supplier, for instance, may be reaping productivity benefits that should have been yours. Or there may be untapped opportunities because your supplier has not been required or incented to find them. It is critical to understand the price you should be paying in today's market.
There are many deal terms that impact supplier pricing at the outset of negotiations. Direct deal terms include the scope, service levels, fees at risk, and the tools and technology deployed. Indirect terms include length of term, benchmarking provisions, inflation risk and even more obscure provisions like limitations of liability.
Some of these deal terms may have appeared more important than they really turned out to be over the course of the relationship. To find potential savings and re-open negotiations with the supplier, start by identifying the deal terms that you can "give on" – and that the supplier will value.
Identify and Negotiate Mid-Term Savings
Pillsbury helps clients successfully renegotiate outsourcing contracts mid-term by assessing the current pricing on the deal using current market labor rates or our CostMarking methodology. This assessment will show if the supplier's pricing is at market or better.
With this information in hand, Pillsbury turns to the contract to determine which terms the client would consider changing to encourage the supplier to agree to lower pricing. Could there be a term extension? Are there minor scope changes that would benefit both parties? Can the client relax certain SLAs based on more current need and experience? Will the client allow the supplier to move more work offshore? Could those 45-day payment terms (that Treasury insisted on no matter what the cost) be reduced to 30?
Get More Than a "Peace Offering"
Demanding a price reduction in tough economic times will often yield a small "peace offering" from your supplier. But to truly impact pricing mid-term requires knowledge of what price you should be asking for from the supplier and a more sophisticated approach than mere table pounding. Pillsbury has the tools, market knowledge and experience to help you get the results you seek.