Time To Re-structure Outsourcing Contracts: Zinnov

The current softening in economy mandates companies to manage the cost of outsourcing more effectively and expect more out of each outsourcing dollar spent. It has been Zinnov’s observation that often, outsourcing contracts were designed through ad-hoc processes with extra slack built-in since the focus during economic growth was expansion rather than optimisation. Existing contracts can be assessed across many dimensions to identify and eliminate this slack to obtain savings to the tune of 8-15 percent in the near term.

To understand the room to negotiate, the existing outsourcing contract needs to be assessed in detail. Further, a deep understanding of the outsourcing vendor’s cost structure along with profitability numbers is essential. To understand the cost structure comprehensively, all possible one time and ongoing costs such as people cost, vendor maturity, productivity, team structures, resource utilisation and other overheads need to be considered.

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Enterprise clients find it difficult to renegotiate existing outsourcing contracts due to a few key reasons:

- Lack of clarity about the impact of renegotiation on future business plans
- Confusion about the criticality of the contract terms
- Limited knowledge of outsourcing vendor’s cost and profitability structures
- Limited insights into industry standards and SLAs

In such situations, consultants could provide insights and guidance to the contract renegotiation process. The most common benefits that are derived out of contract renegotiation engagements in Zinnov’s experience are reduction in billing rate; better sharing of risk (payment terms/ cash flow) with the outsourcing vendor; value-based pricing (where applicable) and better utilisation of sunk costs.
Thus, the current economic situation is a good time to assess the outsourcing contracts and identify areas where value can be added to the organisation, while strengthening the relationships with existing vendors.