It outsourcing contracts renegotiation when qmk why qmk how qmk

ALFREDO SAAD
IT SOURCING CONSULTANT
https://br.linkedin.com/in/alfredosaad

Renegotiation: When?
1st. Scenario
“Nothingseems to work inthe contract”
2nd, Scenario
“Contractno longer meetsrequirements”
3rd.Scenario
“Contractseems to work fine”
Renegotiation: Why? How?
Additional References

 Three scenarios, one of them extremely
surprising, recommend the renegotiation of
your current IT outsourcing contract.
 Each of these scenarios shows distinct
motivations and different objectives to be
achieved during the renegotiation.
 Initially, let us characterize these scenarios
through the perception of the buyer
organization about how much its expectations
are being (or not being) met.

 1st. Scenario
 Nothing seems to work in the contract
 2nd. Scenario
 Contract no longer meets requirements
 3rd. Scenario (surprising ! !)
 Contract seems to work fine
Let us discuss each of the proposed scenarios, taking into
consideration their characteristics, the root causes that
motivated their appearance and the objectives to be
pursued during the renegotiation.

 1st. Scenario Characteristics
 Projected cost reductions do not show up.
 Provider performance is below (sometimes
much below) expectancies.
 Relationship buyer-provider shows an
intolerable degree of attrition.
 Business operations of the buyer organization
are negatively impacted.
 Users’ satisfaction is progressively
deteriorating.

 An unskilled negotiation of contractual terms and
conditions.
 An inadequate services transition.
 A weak or non-existent contract governance
process.
 1st. Scenario Root Causes
The appearance of this scenario is usually associated to failures during
the IT outsourcing project implementation, as follows:
 A bad definition of the outsourcing decision drivers.
 An ambiguous and inconsistent selection of provider(s).

 Contract cancellation and the subsequent
resumption of the service by the buyer or its
transfer to another provider.
 Contract continuation through the renegotiation
of the contract terms and conditions aiming at
fixing once and for all the problems identified.
 Renegotiation Objectives of 1st. Scenario (1 of 2)
As a consequence of the deep contract maladjustment, two alternatives can
be pursued during the renegotiation process:

Naturally, a pre-requisite to the achievement of
an efficient and effective renegotiation is that
lessons have been learned from all failures
incurred during the initial IT outsourcing
adoption process.
As a result, each step of process must now be
appropriately exercised.
 Renegotiation Objectives of 1st. Scenario (2 of 2)

 Buyer organization feels captive of a contract that still
has a long remaining period (for instance, only 4 years
elapsed of an agreed 10-year contract) with no clear
perspective on how to adjust its terms to a new market
dynamics.
 2nd. Scenario Characteristics
 Contract operations are reasonably efficient if we consider the
contractual terms and conditions agreed in the contract signature.
 Effectiveness of business results achieved shows a decreasing trend
because the agreed contractual terms no longer support the mutant
requirements of the buyer organization.

 2nd. Scenario Root Causes
The materialization of this scenario is commonly associated:
o To the rigid contractual terms and conditions that do not
allow some clauses to be rehashed aiming at supporting
the new requirements of the buyer.
o To the increasing speed of the adoption of the so-called
digital disruption and its deep effect over the business
requirements of the buyer organization, through the use of
the new technologies such as cloud computing, big data
analytics, internet of things, mobile apps, etc.

 Renegotiation Objectives of 2nd. Scenario (1 of 3)
The renegotiation effort should concentrate on
reviewing some contractual clauses, or creating new
ones, which can bring more flexibility to the
contract, such as:
1. Contract scope clauses that will reflect the new
requirements demanded and eliminating those
which have become obsolete

2. Quality indicators clauses concerning the new service
items created and eliminating those concerning the
abandoned service items
3. Additional clauses to assure the future demands may be
discussed without impacting the day-to-day operations of
the contract, including those concerning the adoption of
new emerging technologies

In order to achieve such objectives, it is vital that the
contract negotiation process be somewhat refined.
The former process, as we can infer from the adequate
current contract operations, was reasonably
implemented, at least if we consider the original
contractual agreed terms.
Such refinement must focus, as we stated above, on the
clauses concerning the agile and permanent
fulfillment of new requirements.

 3rd. Scenario Characteristics
 Contract operations show an adequate level of
efficiency concerning the services provided and the
contractual terms agreed
 Contract operations show an adequate level of
effectiveness and flexibility concerning the dynamic
requirements of business operations of the buyer
organization

 3rd. Scenario Root Causes
There is only one simple and straight reason that results in
an adjusted contract (both in terms of efficiency as well
as effectiveness): the implementation according to the
best practices of each of the steps of the IT outsourcing
adoption process, from the definition of the business
drivers through the contract governance.
However, the reader of this article will probably have one
question: why a renegotiation is recommended here if the
3rd scenario seems to be so perfect?
The answer will be seen in the next slides.

 Renegotiation Objectives of 3rd. Scenario (1 of 4)
First, there is no scenario that could be called perfect.
Any scenario can be improved in some way and
such improvement may be achieved through a
renegotiation that will lead to still better and bigger
outcomes to both parties.
But ... this is NOT the main reason that should
motivate the renegotiation.
This scenario is unique because it may lead to a
renegotiation that can simultaneously benefit both
the buyer and the provider organizations. Are you
surprised? Let us see.

o If we consider the provider’s viewpoint, the main objective of a renegotiation in
this scenario will be the postponement of the contract termination date, ensuring
additional revenue during a period of time to be agreed.
o For instance, let us imagine that in a 10-year IT outsourcing contract, only 3 years
are left until the termination date. A 5-year extension would turn the remaining
contract period from 3 years to 8 years, resulting in a 167% increase of the future
planned revenue.
o Let us bring in some numbers to clarify the financial consequences of such
renegotiation. Suppose that the monthly revenue of the contract is US$ 2 million.
Such renegotiation would generate US$ 120 million of additional revenue to be
charged to the buyer organization during the 60-months extended period.

o If we consider the buyer’s viewpoint, the main objective of a renegotiation in this
scenario will be to get a discount on the current prices of the contract.
o Back to our hypothetical example: let us suppose that, as a compensation for the
5-year extension, the parties agree a 10% price decrease to be effective
immediately and valid during the remaining 8 years (that is, not only during the 5-
year extended period) of the contract lifetime. That is, the US$ 2 million monthly
invoice will now be a US$ 1.8 million invoice.
o Thus, the accumulated decrease along the 3 remaining years of the current
contract would be US$ 7.2 million (= 36 months x US$ 200,000). Moreover, after
agreeing this 10% reduction, the provider will relinquish US$ 12 million along the
5 additional years of the renegotiated term, as it gets US$ 108 million of
additional revenue and not US$ 120 million, as the previous item had stated.

o Anyway, it is now clear that from the contract renegotiation a mutual
benefit to both parties may result. And, by the way, it must be
obviously noticed that the agreed 10% price reduction will be made
effective without any loss of the quality indicators originally agreed in
the contract.
o Furthermore, the parties should seize the opportunity brought by the
renegotiation to revise and agree some improvements in the
contractual processes, aiming at achieving an even higher degree of
efficiency and effectiveness in the contract operations, deepening the
positive characteristics of the so-called 3rd. scenario.

Additional References (1 of 3)
Other presentations address many complementary
aspects of this theme
All of them were published on SlideShare
See their links on the next two slides

 IT Outsourcing: Frustrating Results? What Went Wrong?
 Crisis in IT Outsourcing Contracts: How to Solve it ... and
what you Should Have Done Earlier
 How Important are the HR teams in an IT Outsourcing
Project?
 Bad News on IT Outsourcing Risks: If not Treated, Their
Effects are Cumulative

 IT Outsourcing Contracts: Heaven or Hell? You choose
 IT Outsourcing Contracts: Relationship between Parties
 IT Outsourcing: The Unreasonable Strategy of
Traditional Providers
 IT Outsourcing Revisited: Providers Should Change their
Attitude or else...

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