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


                                                                                 Glenn Lapidus
       ...
Archstone Consulting at a Glance

                                                                                Services...
Poll Question

Do you currently have a major functional area (e.g., IT application
maintenance, Accounts Payable invoice e...
Poll Question

When does your largest/most critical outsourcing contract expire?



      1. Over 3 years

      2. 2 – 3 ...
An All-Too-Common Current State


• Many outsourcing relationships are based on labor arbitrage savings
       Strategic t...
Opportunities to Capture Additional Benefits

               Significant unrealized cost savings can be captured by advanc...
Poll Question

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


      1. ...
Challenge –
             Regaining Strategic Vision while Retaining Tactical Execution

             Most outsourcing effo...
Start by Asking the Same Key Business Questions That
        Launched The Initial Outsourcing Effort

What
               ...
Then, Analyze the Effectiveness of the Current Outsourcing
   Relationship
                                               ...
It’s Easy To Get Lost in the Tactics of Renegotiation

                                               Typical Contract “Pi...
Identify What’s Needed From an Outsourcing Relationship To
Move Up the Tiers

Besides price, there are three key negotiati...
And Then Focus Your Renegotiation Strategies On these
Strategic Pivot Points


• Increase Flexibility
        Move from FT...
Explicitly Link Provider Performance to Strategic Business
      Metrics


                                               ...
Summary/Final Words


• Start with a frank assessment/“health check” of the current relationship
        Collect and “dige...
Upcoming SIG Events
SIG Webinar Series- every Tuesday                             Register at www.sourcinginterests.org

 ...
Thank you for attending Archstone Consulting’s presentation of:
                                                 New Strat...
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Outsourcing Renegotiation Strategies Framework

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The deck I used in my 14 Apr 2009 Sourcing Interest Group webinar on renegotiation strategies for outsourcing contracts

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Outsourcing Renegotiation Strategies Framework

  1. 1. Strategies to Gain Value when Renegotiating Outsourcing Contracts Sourcing Interest Group Webinar April 14, 2009
  2. 2. 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
  3. 3. 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 3 © 2009 Archstone Consulting LLC. All Rights Reserved
  4. 4. 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 4 © 2009 Archstone Consulting LLC. All Rights Reserved
  5. 5. 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 5 © 2009 Archstone Consulting LLC. All Rights Reserved
  6. 6. 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 ($) Organizational Maturity 6 © 2009 Archstone Consulting LLC. All Rights Reserved
  7. 7. Opportunities to Capture Additional Benefits Significant unrealized cost savings can be captured by advancing beyond the Labor Arbitrage tier of outsourcing savings Example Improvements • Convert fixed to variable costs Tier 3 Change • Create functional delivery “factories” Process Cost Savings Business Optimization ($) • 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 7 © 2009 Archstone Consulting LLC. All Rights Reserved
  8. 8. 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 8 © 2009 Archstone Consulting LLC. All Rights Reserved
  9. 9. 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 9 © 2009 Archstone Consulting LLC. All Rights Reserved
  10. 10. 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? 10 © 2009 Archstone Consulting LLC. All Rights Reserved
  11. 11. 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 11 © 2009 Archstone Consulting LLC. All Rights Reserved
  12. 12. 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 12 © 2009 Archstone Consulting LLC. All Rights Reserved
  13. 13. 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 13 © 2009 Archstone Consulting LLC. All Rights Reserved
  14. 14. 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 14 © 2009 Archstone Consulting LLC. All Rights Reserved
  15. 15. 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 15 © 2009 Archstone Consulting LLC. All Rights Reserved
  16. 16. 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 16 © 2009 Archstone Consulting LLC. All Rights Reserved
  17. 17. 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
  18. 18. 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

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