Renewing Outsourcing Contracts

According to a survey conducted by the Outsourcing Centre, almost 50 percent of the ITO and HRO deals were renewed. Companies often instinctively renew outsourcing contracts, especially if the existing relationship has no major issues. While it may be tempting to renew the deal because negotiating a new deal requires both parties to invest significant energy, time and money, customer must decide whether or not renewal is the best option. Renewal is not always the right choice. 

The survey conducted by the Outsourcing Centre also shows that about 30 percent of the customers renewed the deals for a better pricing model. While pricing is an important factor in deciding whether or not to renew, there are a number of other factors that are equally important to customers. These factors include supplier’s performance over the current contract term, the strength of the relationship with the supplier, the alignment of the current outsourcing model with customer’s strategies and objectives, any change in customer’s operating model, strategy or requirement since the initial contract was executed, whether the customer expects that its operating model, strategy or requirement may change during the renewal term, the capability of supplier to support customer future growth, supplier’s innovation and flexibility, the cost of transition, the ability of customer to manage the transition, the level of risk during transition given other initiatives, the availability of other service providers, changes in appetite for risk, changes in the outsourcing industry, changes in the legal and regulatory environment.

Regardless of whether the customer decides to renew the existing outsourcing contract or to enter into a negotiation for a new one, it requires careful and detailed planning. Renewal presents a very good opportunity for customers to adjust the terms and scope of the outsourcing contract to align with its operations, requirements and business expectations and to ensure that the deal remains competitive. 

The time and effort required for renewing, renegotiating or rebidding cannot be underestimated. Many outsourcing contracts contain boilerplate clauses which require service provider to remind customer of pending expiry about six to nine months prior to the expiry date. In reality, customer should start thinking about the renewal at least eighteen months prior to the expiry date. For example, on average it takes about six months for customer to evaluate the existing outsourcing relationship, consider all the factors discussed above, and make a determination whether or not to renew an existing outsourcing contract. If the customer decides not to renew the existing contract, the customer will need to decide whether or not it wants to renegotiate the agreement with the existing service provider or whether it wants to issue the RFP for rebidding the services. If it decides to proceed with the RFP option, it will take about six months to gather information to develop and issue the RFP, evaluate the bidders, perform due diligence, and make the down select decision. Therefore, in order to have proper planning and to retain leverage in the negotiation, it is important for customer to start thinking about any potential renewal early.

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