Tips for negotiating entry into an outsourced supplier relationship

The biggest risk in a new service delivery partnership

Without exception, the single largest key challenge in moving into a new strategic partnering arrangement with a service provider is a lack of clarity and quantification over both parties’ expectations and outcomes from the relationship. In other words, being clear about ‘what good looks like’ for the outcomes you want to achieve.

Whether it is a large IT project that does not achieve its fitness for purpose, or the outsourcing of business processes that are not achieving their business outcomes (for either party), more than half of these strategic relationships fail because of misaligned expectations.

Our experience in the hundreds of problematic service delivery relationships which we have been asked to realign, evidences that when moving into a new strategic service delivery relationship, the degree to which you are able to quantify your expectations, objectives and outcomes between you and your service provider will be directly reflected in the speed, cost-effectiveness and innovation in both parties achieving their expectations from the relationship.

But there is another advantage of having this clarity. At the early stages of a relationship, in particular during the procurement process, your potential strategic partners are looking for something very specific: to know if they are dealing with an ‘Intelligent Client’ (IC).

Strategic service partners know the ‘intelligent client’ will be able to clearly articulate what they want, quantify the benefits they expect, and have a clear vision on smart KPIs and other relevant performance management processes by which the partner will be measured. A strategic service partner working with an ‘intelligent client’ knows they will have a much easier time in delivering to that client’s expectations.

Likewise, partners who are willing to be accountable for their service delivery, know that if they perform well for their client, they will be able to widen their remit to provide even better value across more services over and above their original contractual relationship, because the client will have evidence of the provider (and themselves) driving maximum value for money during the course of the relationship.

Negotiation strategy

So what does all of this have to do with negotiating your way into a new outsourced relationship?

As a potential client of a strategic partner, put yourself in their position. What type of client would you rather deal with: one that is unclear about their expectations and putting the load onto the strategic partner to somehow work it out? Or a client that can quantify exactly what its expectations are, what type of innovations they have been thinking about and how they will specifically measure success?

As a strategic partner, which of the above two clients do you think is the lowest risk to deal with (on the basis you have confidence to be held accountable for the quality of service delivery)? And, as a potential provider, how hard would you negotiate the contract and what amount of financial risk premium would you put into the pricing of your services if a client is unclear about its expectations and how they intend to measure success, versus a client that is very clear and understands exactly what evidence is needed to prove the relationship is delivering maximum value?

Your greatest strategy in negotiating a contract for a strategic partnership is being clear about your expectations and how you will measure your expectations in evidencing value for money. Highly competent service providers relish intelligent clients. Providers would say that they don’t get many of them, but, from their perspective a ‘tough but fair’ nature makes them a dream to deal with.

Alternative methods of negotiation

If you aren’t clear about your expectations, you might think of yourself as a master negotiator who can beat potential service providers into submission because they are desperate to win your business, so they will sign up to anything you ask. Perhaps you believe outsourced providers tremble at the sound of your name or the sight of you striding into the boardroom? Maybe you pride yourself at how much you saved your organisation this year, thanks to your way with words and ability to read your enemy to extract every last penny out of the ‘deal’ with them?

Then again, if you are being honest with yourself, how much have you lost your organisation in failed relationships through poorly considered business outcomes, mismanagement and squeezing the pips of your outsourced partner’s margin?

Negotiation is not just a game of one-upmanship, especially in large outsourced relationships where such partnerships may last for decades. Having dealt with realigning hundreds of these relationships, this is a very short-sighted approach and usually leaves a trail of destruction in its wake.

Successful negotiations are about being clear and quantifying the benefits you expect. You then create an environment where all parties are motivated towards achieving your goals.

Beating your supplier down on price may win you short-term praise, but in the long run, a vendor denied a ‘reasonable’ fee for their services, providing they are able to evidence real value, will start to resent their situation and look for ways to cut corners, curb innovation, renegotiate or work to rule.

Clarity, backed up with strong governance and a procurement and contract process that is correctly aligned to both party’s business outcomes are the keys to negotiating your way into a successful outsourced supplier relationship.

The tactics to a successful negotiation

Because of our experience in realigning these relationships over the years, we always try to ensure clients understand that the one most challenging task they will face in their outsourced relationships is the definition and dissemination of what good looks like.

Unless you clearly appreciate what you are aiming for, it is all too easy for your relationships to suffer from scope creep, costly delays and uncertain outcomes, not to mention the fact that if you are not crystal clear about what you want from your external service provider, how can you communicate this to them so that they can deliver on your expectations?

When putting your service or project needs out to the market and negotiating the best deal possible with your providers you will need this clarity. It’s essential for comparing like for like services between suppliers, and no deal will be a good deal if its outcomes are left more to chance than design.

Holistic clarity. Challenges and aspirations, expectations and limitations must all be discussed openly and frankly with providers to ensure that they form the most appropriate solutions.
The grand scheme of things. Make sure that everyone understands where the service or solution that is being outsourced fits within the structure of the organisation and the knock-on impact of success or failure and all the stages in-between.
Start with what you’re doing. For an outsourced service or solution provider to determine the best approach they must know how you currently run things, what has worked and what hasn’t and why, as well as the costs involved and service levels expected.
Set out what’s expected. Minimise the opportunity for miscommunication and misunderstandings with a clear response matrix defining expected outcomes, acceptable flexibility to deviate from these outcomes and delivery levels, consequences of deviations, and clarity on how the provider will deliver these outcomes.

Keeping an eye out for opportunistic providers

In an ideal world, the aspirations and expectations of both client and outsourced vendor are reasonably well aligned, with little room for ambiguity, and have everyone pulling in the same direction. But we know that the realities of life and business are such that influences at an individual and corporate level often get in the way. This is why it is so important to have a skilled team of individuals overseeing the assessment of ‘what good looks like’, the development of all appropriate relationship management documentation and progress towards these goals. This will require a properly resourced ICF (Intelligent Client Function) team.

We have written at length about the shape and skills of this vital team. However, even when you have the right quantified outcomes and expectations, some vendor legal teams still like to ‘try it on’.

So, there are a few contractual ‘gotchas’ you just need to be mindful of. Your ICF team will be able to recognise and wheedle out any onerous or devious clauses that start to find their way into the contract.

Such clauses can compromise the integrity of your relationship, but there will always be some out there willing to weight things in their favour for one reason or another. As this is part of any pre-contract negotiation process towards developing a mutually acceptable contract, some of the worst offenders to look out for are:

Blanket exit fee clauses. If you are exiting a contract for convenience then you are likely to be responsible for the cost of transferring the service. However, if you are exiting due to poor performance then it would be fair to assume that the burden of cost should lie with the provider. There is much grey area in-between, but contracts should never contain clauses that require clients to cover the costs of exiting an agreement in the event of material breach of service by the provider. It’s also critical that all material costs are provided upfront and that an exit plan is updated every six months to stay in line with your current service delivery practices.
Set-off rights excluded clause. If your provider does not achieve the standards or levels of service you are paying them for, should you still pay them the full amount? Some will look to use clauses that exclude your right to stop paying until the services you’re paying for have been completed to the agreed levels. Worse still, some will include clauses that allow them to suspend services if you don’t pay them in full, even if they are underperforming.
Clauses that exclude advice and assurances. A fundamental part of your protection within your relationship is that those assurances offered by a provider before signing a contract are included in their obligations to you under the contract.
Limited liability clauses. While perfectly reasonable to expect that a provider will look to limit the costs to them should the project go wrong, it is also sensible for you to accurately estimate reasonable losses calculations to incorporate within your contract.
Missing clauses. An ‘agreement to agree’ is where to put a clause to one side with an agreement to go back to it later on once the contract has been signed. While perfectly logical for expedience, this is dangerous legally as agreements to agree are notoriously difficult to rely on. Although there have been recent developments in case law that help support this, better to avoid the ambiguity in the first place by quantifying what it is you expect.

A good contract is an up-to-date contract

Contracts should not be left to fester, gathering dust in a locked filing draw or digital folder. They should mature and change, adapting to the realities of their environment, regularly being updated, ideally every six months, and added to in order to achieve best value from your relationships.

All too many outsourced relationships start out so well with a properly negotiated contract, only to let their viability slip into irrelevance as practices and processes change and the contract remains unchanged. The greater the distance between the everyday practicalities of a relationship and its contractual obligations, the greater the chance for disputes to arise.

Though in-contract negotiations are a subject we tackle in another article, we should note here that maintaining the status quo within your contractual agreements is not good enough; a planned programme of review and refresh should be built into each contract to ensure that at least every six months the contract is brought up to date with the realities of the relationship.

In conclusion

Negotiation, best value service delivery, clearly quantified outcomes and specific performance measures are what provides the clarity for both parties to negotiate a win-win contract. It is not a one-sided promotion, nor a sledgehammer and the best ‘deal’ never relies solely on the amount of discount you squeeze from your suppliers. Negotiation must create an environment that promotes the right behaviours, rewards genuine innovation and added value and engages supplier commitment. Contracts need to be vigilantly reviewed to ensure their fairness, and regularly updated to maintain their viability, clarity and focus on quantifiable outcomes.

Top tips for negotiating your entry into an outsourced supplier relationship