So, you have this process that you want to outsource or you may already have a supplier beavering away for you behind the scenes, it is a recession and you are thinking to yourself ‘I should get what I want for a hell of a lot cheaper’. With that in mind you rub your hands together, step into the meeting room and so follows the loud noises associated with a supplier being hammered down on price.
Now some may think that this is just the way the cookie crumbles during times of economic turbulence, where the ‘cost is king’ approach to outsourcing is rife. This may be the case, but end users need to be wary of archaic negotiating. A spur of the moment decision to drum down outsourcing prices without any consideration of the overall outsourcing relationship could be cause for regret further down the road.
sourcingfocus.com has set out on a quest to find out the best ways users can get the maximum from their supplier whilst ensuring the people doing the work have enough incentive there to do it properly.
Price is always a delicate matter that needs careful debate from all parties in an outsourcing deal. End users need to ensure that value for money is being achieved and suppliers have to see a good incentive for delivering excellent service. If the balance tips excessively in one direction then both parties will find that the relationship turns sour and ultimately fails.
Martyn Hart, Chairman of the National Outsourcing Association, offers an example of the repercussions associated with a blinkered view point, “By focusing solely on reducing costs rather than maximising the potential benefits the supplier can provide, end users are putting additional pressure on suppliers to lower their bid to an unprofitable level in order to secure the business.
However, it should come as no surprise that suppliers attempt to claw back their initial losses as time goes on. No supplier wants to sell like this, but competitive bidding processes such as these leaves them with no alternative. Suppliers will use constant change requests and other variations to extract extra revenues from the contract without the scrutiny of a procurement process or comparative pricing mechanism.”
With this in mind, how can end users look to maximise an outsourcing deal without putting service delivery and relationship management at risk? William Benn, Partner & Head of Public Sector at Alsbridge, an outsourcing advisory firm, believes that there are steps end users can take to maximise their outsourcing arrangements,
“Price is definitely an aspect of the outsourcing arrangement that should be discussed. However, hammering suppliers down on price will result in the supplier looking for retribution and making back the costs further down the line. Clients should look to sit down with the suppliers and talk about the issue of cost as a joint problem solving experience.”
Mr Benn does make the point that there needs to be a healthy relationship with the supplier in order for the negotiations to be worthwhile. If there are any issues outstanding with the supplier then these need to be addressed and resolved first, there is no point in looking for price reductions for a service that you are not happy with anyway.
The end user does not have to adopt the single approach that they want the same service for less. Mr Benn points out that there is a certain amount of give and take that can be done in order to achieve mutually beneficial results, for example clients could look to get less active processes put on hold and the resources either reallocated to more core services or the price of the overall service to reduce for a period of time.
Clients could also negotiate a current saving whilst handing over more work to the supplier further down the line or extending an original contract. If the outsourcing arrangement is going well then why not look to extend it in order to get more savings now?
Srikanth Iyengar, Global Head of Business Development for Strategic Global Sourcing at Infosys, believes that suppliers are there to help end users achieve their cost savings, “Suppliers would not want to damage their reputation by reducing service to clients looking to make savings. There needs to be a partnership approach to achieving the cost savings needed, expanding an original commitment will allow suppliers to look at offering cost reductions now.”
Offering incentives to a supplier could also reap immediate cost savings. Having lucrative bonuses available to suppliers who exceed long term SLAs could result in the reduction of day to day cost which may free up initial capital for end users whilst simultaneously ensuring that suppliers have sufficient incentive to carry out the work effectively.
According to William Benn it is a buyers market right now, however, users need to ensure that they are following the traditional best practices when engaging in new outsourcing deals. Those looking to outsource for the first time may be better off if they seek external experience in the form of advisories firms or consultancies, not just as a way of internally assessing whether outsourcing is right for them, but these advisory firms will have an idea of which suppliers in the market place are prepared to negotiate in on price.
Clear honest communication should be the first port of call for any end user looking to negotiate on price. By being open with suppliers and actually working out a mutually beneficial strategy, end users will find that they get the best from their outsourcing deal. Taking a hard nosed stance, not negotiating and forcing a supplier into a corner will result in a backlash that could involve higher costs in the long run and, possibly worse, a diminished service.