by David M. Wall, Principal Consultant, ISG
In the 1964 classic song, the Rolling Stones lament “Time Is On My Side.” Far too frequently, that’s the mindset clients hold about outsourcing contracts. After the often-lengthy process of contract negotiation and implementation, there’s an inherent tendency to “settle in” to vendor management and service delivery mode. The part of vendor management that often gets lost in the mix is the time needed for renewal. By far, the most important leverage a client has is time. Time to get the best renewal terms possible, time to have enough “outs” to appropriately motivate the service provider, and time to assess the latest trends in market pricing, terms and conditions and service level agreements. And, as Paul Reynolds recently posted, a record number of contracts expired in 2011.
“How much time do I really need?”
For broad human resources (HR) contracts, you should plan to start the renewal process 30 to 36 months prior to the contract end-date; for benefits administration (defined benefit plans, defined contribution plans and health and wellness), you should start 18 to 24 months prior to contract expiration. Why so long, you ask? The “out” requiring the most time is going down the request for proposal (RFP) path to solicit competitive bids. In the worst-case scenario (time-wise), you go with a new service provider. The RFP process itself will run anywhere from more than three months for a benefits RFP to more than six months for a broad HR RFP. That’s the time needed to create and release an RFP, receive responses from bidders, down-select and make a final selection. Next, you need to factor in time to negotiate the contract. This can run anywhere from one to three months for a benefits contract and three to more than six months for a broader HR contract ± depending on services included, complexity and international populations. Finally, there’s implementation. Pension implementations can take up to 12 months for complex plans. Broad HR contracts can take up to two years for multi-tower, broad scope transactions that need a phased-in approach.
“But my plan is to renew with my current provider”
Regardless of your plan, you must have appropriate time for potential “outs” to extract the most leverage possible. If you’re just starting discussions with a service provider six to 12 months out, that provider realizes the predicament you’re in — including the time it would take for you to execute the aforementioned steps — and your leverage is greatly diminished. On the other hand, the cost for a service provider to replace lost work is extraordinary. The service provider’s macro business objective once a client signs on the dotted line is to renew the contract. Furthermore, the last years of the initial contract typically are the most profitable for the service provider. By that time, the start-up costs have been fully amortized, and the bumps in delivery have been smoothed out. Given this reality, the top-tier service providers typically will be proactive in triggering renewal discussions — but not always and not always in a timely fashion.
Time can be your friend or your enemy
With all this in mind, make sure time is your friend. Start this process with enough time to afford you the best outcomes possible. ISG is always available to help you with any part of the process from — market pricing, trends and analysis to leading the RFP process and negotiating a contract.