Step Up Renegotiation
... The Smart Alternative?...
No doubt you will have seen the embarrassing statistic that 70% of outsourcing contracts are simply ‘rolled-on’ at their natural termination date, without the benefit of any market competition or any significant re-negotiation. Yes, there are very real pressures to stick with ‘the devil you know’, to prevent management overload and to avoid any risk of service disruption.
But is this passive acceptance of the status quo really the best we can do? Is there a smarter alternative?
More than likely, as your existing contract approaches its natural termination date, either your sourcing advisor or your procurement department will recommend a full market re-tender as being self-evidently the 'right' solution. On the face of it, a full market competition does indeed appear to tick all the boxes....
Firstly, it allows you to see just how far the market has moved on in the intervening years in terms of supplier capability, technology solutions, service delivery models, pricing, commercial models and other key contractual deal principles.
Secondly, it brings maximum pressure to bear on your existing supplier to come up with an attractive and fully competitive follow-on proposal, and the end result will by definition be demonstrably market competitive.
Thirdly, it removes any exposure to hostile stakeholders or auditors criticising you for poor governance in taking the lazy or even ‘cozy’ solution of sticking with your existing supplier without even having tested the market.
But what about the disadvantages and risks which are inherent in the whole process of going to market and quite probably changing supplier?
For starters, there will inevitably be an extended period of uncertainty and paralysis during which little transformational progress can be made and important new initiatives will have to be deferred. Then there is the risk of service degradation and business disruption caused by demotivating and distracting the existing supplier and overloading the internal management team. Not to mention the additional cost of advisors and lawyers to support the whole exercise.
The most common result of a full market competition is that you will have found keen fresh suppliers who are offering a prima facie more attractive solution than your current supplier. If you ignore the result on the grounds of “Better the devil you know than the one you don’t” and override the competitive process in order to stick with your existing supplier, then you really have to ask yourself exactly what was the point of having suffered all the pain of a full market re-tender. If you accept the result and go ahead with a change supplier, you will inevitably lose much of the key business knowledge which will have accumulated within your current supplier team over the years and there is a real risk of even greater service degradation. The harsh truth is that, however strong your due diligence, it is fiendishly difficult to predict how well a new supplier will perform in practice within your own organisation in comparison to your existing supplier, so it can easily end up as a case of ‘Out of the frying pan and into the fire’.
The situation will be even worse if you have not been managing the basics properly over the preceding years and so find yourself with one hand tied behind your back as you go into the market competition. You need to ask yourself some hard questions;
- Have you started early enough to allow yourself enough time to run a competition and to transition smoothly without losing the negotiating advantage as deadlines approach?
- Have you retained all the know-how and data necessary to actually run a meaningful competition?
- Have you taken appropriate steps during the life of the contract to avoid lock-in to your existing supplier - maintained a proper exit plan, avoided dependency on proprietary IPR, etc.?
Having said all that, with proper advice and support and preparation, going to the market is nearly always a much better option than simply extending the existing contract with your existing supplier more or less as it stands.
But perhaps there is an even smarter alternative – is there somewhere half way between simply extending your existing contract with your existing supplier and rushing headlong into a full market re-tender?
In our opinion, the answer is a definite yes and the solution is ‘Step-Up Renegotiation’, an approach that we have now refined and deploy routinely to great effect in almost all our sourcing initiatives.
The underlying idea here is that, before you go to all the trouble of a full market competition, you should fully explore whether your existing supplier is willing and able to ‘step-up’ to current market best practice. This may represent a considerable change for your supplier against what they are currently delivering – in capabilities, service offerings, prices, service levels, deal principles, and behaviours – but if the required degree of improvement can be extracted from your current supplier, then you will have the best of both worlds. You will have achieved a market best practice solution, which is all you could achieve from a full market competition anyway, and you will have avoided the pain and risk and cost associated with a fully competitive process and potentially a change of supplier.
The first requirement for this ‘step-up re-negotiation’ approach is to have a clear understanding of exactly what represents current market best practice and to communicate your ‘step-up requirements’ clearly and confidently to your supplier, secure in the knowledge that they are not just a wish list but rather a considered target which it is perfectly reasonable to expect a competent supplier to meet, albeit grudgingly. For this, you will need current market input on ‘what good looks like’ in terms of supplier capabilities, service and pricing models, prices, service levels and deal principles – typically from a sourcing advisor who has access to a wide range of current sourcing deals.
The next key to success is to apply the maximum leverage to your existing supplier and make sure that they understand the full size of the prize and the full consequences of failing to step up.
Your main ‘carrot’ will obviously be single-tender award of an extended contract term which means reduced sales cost and additional revenue for the supplier. You may also be able to offer additional scope in terms of immediate new projects or transferring work packages from other suppliers or from in-house or the potential for other major upcoming projects or additional service areas. You could introduce other less tangible benefits such as becoming a ‘strategic supplier’, positive publicity or closer access to the business.
Your main ‘stick’ will be the threat of a move to full market re-tender (either immediately or in due course) and the associated risk or even probability of losing the account. You can also up the ante by making it clear you will exclude your existing supplier from the market re-tender, with associated negative publicity as appropriate, if they do not step-up sufficiently.
The final ingredient is to follow a strict and structured process – a tight window of around 3 months during which you will conduct exclusive ‘step-up’ negotiations with the supplier to the point of contract – but with a clear understanding that if the supplier has not stepped up sufficiently by the end of this period, or looks as if they are not going to do so at any point during the period, then you will call off the process and go straight to full market tender.
You may face a challenge as to whether accepting the result of a ‘step-up’ negotiation and extending single-tender with your existing supplier has delivered a truly market-competitive solution. This is best handled by showing that you have taken independent advice on what represents market best practice including pricing, and that the re-negotiated arrangements with your existing supplier match up sufficiently well against this market benchmark.
In summary, you should always consider inserting a properly structured ‘step-up re-negotiation’ with your existing supplier into the process BEFORE you go to a full market competition. In our experience, this approach will usually deliver a demonstrably market-competitive solution with all (or nearly all) of the improvement you were looking for, but crucially without the costs and risks and negative consequences inherent in a market re-tender and/or a change of supplier. In other words it delivers the best of both worlds.
To Negotiate or not to Negotiate?
So next time you are tempted to extend an existing contract with your existing supplier, or you are being advised to go straight to a full market re-tender, why not stop and think and talk to us about the smart alternative of running a properly structured ‘step-up re-negotiation’ first?