Consider the Source

Pulling the Renegotiation Levers

Dale Hearn of TPI’s Financial Analysis Services Group will be "blogging about the bottom line" this week.

Of the many factors that come into play during sourcing decision-making, financial drivers within the existing contract are critical.

Companies must decide whether to renegotiate their contract with their current provider (re-source), choose a new service provider, or bring the services back in house (in-source). Several clients that I worked with over the past couple of years made a conscience decision to renegotiate with their current service provider based solely on the overall financial implications of the deal.  For more information, check out my colleague's whitepaper.

Service levels, client satisfaction surveys, balance of trade issues, and executive relationships all had an impact in renegotiations, but the most important factors for these clients were based on the NPV (net present value) and profit margins over the term of the deal.

How To Succeed In Sourcing By Really Trying

I’m sure many of you have seen the recent posting on CIOInsight.com, IT Outsourcing: Expect the Unexpected, about whether cost savings really materialize through outsourcing.

Both the CIOInsight.com survey and recent TPI research support the same theory: Nothing of value comes without effort.  Results, notably cost savings, come from diligent management.  (To read our study, see: Restructuring Outsourcing Agreements: An Indication of Failure, or a Tool to Increase Value?.)

However, one of the unspoken realities in the CIOInsight.com report is the urgency to avoid entering an outsourcing relationship that is doomed from the outset.  Our experience reveals that about 35% of aspiring outsourcing clients are guided to take another path – shared services, internal transformation or captive offshoring.

The principle reasons for avoiding an outsourcing agreement?  1) lack of readiness to change the management models employed across the enterprise; and 2) lack of resources to effectively manage outsourcing relationships.

The CIOInsight.com report focused on whether money is saved.  That’s certainly one perspective, albeit arriving at an answer requires a complex computation for most firms.  A true analysis means asking, “What  would I have spent had I not outsourced?” compared with a view of “What have I actually spent for the same quality and volume of services?”   Again, those are difficult computations.

Informed research on the topic reveals that outsourcing, if done right, is always a money saver. The key is to know when to do it, how to do it right, and the best way to manage results.