Outsourcing Renegotiation Strategies Framework

Strategies to Gain Value when Renegotiating Outsourcing Contracts
Sourcing Interest Group Webinar
April 14, 2009

Featured Speakers

Glenn Lapidus
Mark Peacock
Principal
Principal
Chicago, IL
Chicago, IL
(312) 325-2910
(312) 325-2920
glapidus@archstoneconsulting.com
mpeacock@archstoneconsulting.com

Principal in the Outsourcing Advisory
Leader of the Outsourcing Advisory
Practice at Archstone Consulting
Practice at Archstone Consulting
20 years of experience in consulting,
15 years of experience assisting clients
outsourcing and systems implementation
develop and implement outsourcing and
offshoring strategies
Glenn’s experience as an advisor and as
a provider has focused on improving
Mark's experience includes all aspects of
outsourcing performance with an
IT and call center outsourcing/offshoring
across all stages of the lifecycle – emphasis on customer/provider
collaboration strategies
strategy, procurement, negotiation,
implementation, and restructuring.
Prior experience – IBM, Deloitte
Prior experience – Deloitte Consulting, Consulting
IBM

2 © 2009 Archstone Consulting LLC. All Rights Reserved

Archstone Consulting at a Glance

Services Industries
A Strategy and Operations Archstone • Operations • Life Sciences
Improvement consulting firm Consulting • IT Effectiveness • Consumer Products
• Operations
Service • Manufacturing
Founded in 2003 to provide Improvement
Offerings • Utilities and Energy
• Sourcing/Procurement
independent advisory services in and • Outsourcing Advisory • Financial Services
key industries and service areas • CFO Advisory
Industry • Financial Process
Segments Improvement
Serve leading global organizations • Reporting & BI
(including 24 of the top 100
companies and 58 of the top 500 DEFINING A NEW AGE IN CONSULTINGSM
according to the latest Fortune
rankings)
Headquartered in Stamford,
Connecticut with offices in New
York, Chicago, San Francisco,
Toronto, and Amsterdam
Have over 200 consulting
professionals worldwide

www.archstoneconsulting.com


Poll Question

Do you currently have a major functional area (e.g., IT application
maintenance, Accounts Payable invoice entry) outsourced?

1. Yes, as a managed service

2. Yes, in a staff augmentation arrangement

3. No

4. Not sure


Poll Question

When does your largest/most critical outsourcing contract expire?

1. Over 3 years

2. 2 – 3 years

3. 1 – 2 years

4. 0 – 1 year

5. Already expired


An All-Too-Common Current State

• Many outsourcing relationships are based on labor arbitrage savings
Strategic transformation gave way to rapid one-time cost reduction
Functional process redesign gave way to “lift-&-shift”
Majority of change is contained within the functional area;
little impact is made on business users
• This “one & done” approach satisfies the need for immediate cost
reduction, but builds nothing for the future
Moves the cost line down. . .
But doesn’t change the slope Pre-Outsourcing
of the line – the rate of cost
Functional Cost
Post-Outsourcing
growth
($)

Organizational Maturity

Opportunities to Capture Additional Benefits

Significant unrealized cost savings can be captured by advancing
beyond the Labor Arbitrage tier of outsourcing savings

Example Improvements

• Convert fixed to variable costs
Tier 3 Change
• Create functional delivery “factories”
Process
Cost Savings

Business
Optimization
($)

• Improve process discipline
Tier 2 Eliminate
• Rationalize roles/responsibilities
Delivery Activities
• Align service levels to business needs
Model Change

• Reduce labor rates
Tier 1 Reduce Unit
• Leverage scale economies
Labor Arbitrage Costs
• Improve service levels
Organizational Maturity


Poll Question

Into what tier do you fall with regards to your largest/most critical
outsourcing relationship?

1. Struggling with Tier 1

2. Comfortably in Tier 1

3. Reaching into Tier 2

4. Comfortably in Tier 2

5. Achieved Tier 3 Nirvana


Challenge –
Regaining Strategic Vision while Retaining Tactical Execution

Most outsourcing efforts start with a focus on strategic transformation and
partnership. Too often, the vision is lost in the mechanics of the process.
Effective renegotiation requires refocusing on the strategic objectives.

Outsourcing RFP and
Contract Transition to Relationship
Strategy Provider
Negotiations Vendor Renegotiation
Development Selection
Strategic

Reestablish
Operating Model Strategic
Strategic
Transformation Partnership
Partnership
Scope of
Initial Services
Tactical

Rates, Committed
Hours, ARCs/RRCs

Time


Start by Asking the Same Key Business Questions That
Launched The Initial Outsourcing Effort

What
 Drivers: Addressing goals beyond cost savings
 Portfolio: Need for re-balancing – re-insource some function; outsource others
What to Globally
that were considered too immature during last effort
Source?
 Preparation: Documentation of process definition, interdependencies, risks
Where
 Location: Rebalance global distribution of work?
Onshore
Offshore
 Maturity: Ability to migrate on/near-shore processes to lower cost locations
Near-shore
 Scalability: Candidates for consolidation to achieve scale economies
Captive
Why
 Costs: Are the total costs of process ownership well understood?
Financial Proof of
 Service Levels: Are the costs of failing to meet standards well understood?
What and Where
 Metrics: Determining what is important to measure and how to measure it

How
 Governance: What activities are needed to manage all aspects of relationships?
How to Measure
 KPI’s: What are the key measures and corrective actions they trigger?
and Manage the
Supplier  Development: How to get future process improvements and cost reductions?


Then, Analyze the Effectiveness of the Current Outsourcing
Relationship
Governance
Decision-making processes
Issue resolution
Escalation procedures

Governance

Operational Performance
SLA performance
Financial Performance
Penalties incurred Renegotiation Savings realization
Operational Financial
Root cause analysis Strategy
Performance Performance Change order volume
Operational benchmarking
Pricing benchmarks
Process improvements
Technology and tools
Stakeholder
Expectations

Stakeholder Expectations
Transformation
Process standardization
Flexibility

It’s Easy To Get Lost in the Tactics of Renegotiation

Typical Contract “Pivot Points”
Price Scope Service Level
• • •
Development Relationship Relationship
– Rate Card – Account management team – Burn-in Period for SLAs
– Volume Discount – Reporting / Invoicing – Customer satisfaction SLA
– Tenure Discount – Thought Leadership – Turn-over SLA
• • •
Maintenance Development Development
– Fixed Price – Roles and Responsibilities – On-time Delivery SLA
• – Approach / Deliverables – On-budget delivery SLA
Other Costs and Assumptions
– Inflation Assumption – Staffing Model – SOW response time SLA
– Benchmarks and price re- – Tools / Infrastructure – Defect rate SLA
negotiation timing • •
Maintenance Maintenance
– Amortized start-up fees – Roles and Responsibilities – Time-to-response SLA
– Overhead and administrative – Support Levels – Time-to-workaround SLA
costs
– Staffing Model (FTE pool) – Quality of fixes SLA
– Pass-Through Costs /
– Tools / Infrastructure – Availability SLA
Expenses
• – Time-to-restore SLA
Transition
– Early Payment Discount
– Approach • Credits / Penalties
– Project inception start-up fees
– Timing – At-risk amount
– Continuous Process
– Interim Staffing – Earn-back structure
Improvement Targets
– Milestones / Credits – Weight factors


Identify What’s Needed From an Outsourcing Relationship To
Move Up the Tiers

Besides price, there are three key negotiation “pivot points”. . .

• Flexibility
Staffing
Service Levels
Pricing
• Collaborative Client-Provider Relationship

Functional Cost
Strong provider account
management team

($)
Strong functional area-business unit
alignment
• Effective Performance Measurement
Reports business value and contract
Time (years)
performance
Supports continuous improvement through
root-cause analysis


And Then Focus Your Renegotiation Strategies On these
Strategic Pivot Points

• Increase Flexibility
Move from FTEs to “bucket of hours”
Link service levels to key business performance metrics
More symmetrical ARC/RRC pricing structure
• Drive Performance-Based Pricing
Improving high-cost/volume process
Exceeding business case savings
Reducing change order volume
• Shift to Higher-Value Services at Current Pricing
Transaction → Reporting →
Finance/ Analysis
Accounting
Build/Run → Plan/Define →
IT Architecture


Explicitly Link Provider Performance to Strategic Business
Metrics

Performance Metrics Examples
IT spend as a % of
% Revenue Growth
Strategic revenue

Distribution of new
Customer
development vs.
satisfaction
maintenance spend
Metric Cascade

Metric Support
Select metrics in
a “cascade,”
Maintenance spend
starting with top- Tactical Service Availability
by platform/system
level goals to
assure that each
lower-level
metric supports
Number of maintenance
those above it
Application availability
work orders

Code errors Number of non-user
Operational committed to generated maintenance
Production work orders


Summary/Final Words

• Start with a frank assessment/“health check” of the current relationship
Collect and “digest” learnings from the current situation
Understand impact of changes in business strategy/need
Identify areas needing operational and financial improvement
• Focus negotiation efforts on points that will increase business value
Improved flexibility
Extracting/using the full value of provider capabilities
Effective performance management


Upcoming SIG Events
SIG Webinar Series- every Tuesday Register at www.sourcinginterests.org

April 21, 2009 - Neutralizing the US Postal Rate Increase: Strategies and tactics Procurement and
Sourcing professionals should know to help control the cost of mail
Presented By: Océ Business Services, Inc.

NEW DATE: Thursday, April 23, 2009 - Winning Tools and Techniques for Sourcing in a Down Market
Presented By: Denali Consulting

April 28, 2009 - An Integrated View of Supplier Risk: Protecting your Company’s Results and Reputation
Presented By: Hiperos LLC

May 5, 2009 -Untapped Savings Opportunity: An Innovative Approach to Rapidly Reduce Costs
Presented By: ICG Commerce and The Hackett Group

SIG Global Leadership Summit, Loews Coronado Bay, Coronado, Calif. October 20 – 23, 2009

Upcoming Regional Meetings
Regional Meetings are one-day gatherings that provide an intimate setting for providers to interact with
corporate users.
SIG's Regionals provide education and local networking for members and invited non-member corporate users.

– Tuesday, April 28th – New York City
– Thursday, April 30th – Chicago
– Wednesday, May 20th – Toronto
Register at www.sourcinginterests.org
For more information, call 530-582-8600

Thank you for attending Archstone Consulting’s presentation of:
New Strategies to Gain Value when
Renegotiating Outsourcing Contracts

Since 1991, the Sourcing Interests Group (SIG) has provided forums for networking, relationship building, knowledge sharing and
education in a non-commercial environment.

SIG, a recognized industry-leading, membership-based organization, helps members to achieve improved business results, sooner, at a
lower cost and with reduced risk across the spectrum of outsourcing, offshoring, insourcing, procurement and shared services. SIG
members are from both the user and provider communities drawn from Fortune 500 companies.

For more information go to www.sourcinginterests.org

Outsourcing Renegotiation Strategies Framework

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