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Ways to Maximize Outsourcing Partnerships

by: Sarah Joson

Tuesday, June 10, 2014 |

In outsourcing negotiations, the benchmarking clause often puts parties involved in uncomfortable positions. IT outsourcing clients are presumed to use the clause to haggle and low-ball providers. This is often cited as the reason for weak outsourcing partnerships.

Benchmarking directly affects governance and trust, making it a sensitive issue because it shows that the customer could either be unsatisfied or feels that the providerís competency is questionable even before the partnership starts.

According to an article at CIO.com, there are five ways outsourcing buyers can confirm if the pricing and offerings of providers are still competitive with the market:

1. Clear and detailed pricing models.
Having clear and detailed pricing models would enable customers to easily compare and understand the going rates in the market. However, not all IT service providers are as open in sharing clear and direct pricing points as it can reveal trade secrets, leaving providers with tighter margins. In order for providers to avoid issues pertaining to this, they can accompany price points with proper explanations and descriptions of each item/process.   This way, customers will not have to question why a certain process was tagged a certain amount.

2. Reduce cost through certain triggers.

In some cases where benchmarking is unlikely to work, both parties could agree on an automatic price reduction scheme that will take effect once specific clauses are activated. Some of these triggers could include unsatisfactory output by the service provider or the client keeping in line with the minimum volume of orders for a certain period. However, experts believe that setting triggers for downward pricing adjustment would take more time in resources before it is actually applied, therefore delaying the launch of the operation.

3. Renegotiations for long-term contracts.

It is only fitting to set renegotiations for long-term contracts since these would have to withstand the changes in the business environment and other factors that can impact its efficiency over the prescribed period of the agreement. As the contract is panning out, providers are expected to become more cost-effective while rendering their services. But some providers think that renegotiations are not advantageous for them, unlike for their customers since there is very little for them to gain. They are more prone to lose the savings that they are entitled to, unless a gain-share scheme is implemented.

4. Get the chief financial officer involved.
Having an influential decision maker such as the service providerís chief financial officer can help iron out issues related to the authenticity of benchmarking requests. The CFO would have to validate if the pricing is indeed competitive and is fair for both parties. The certificate can be renewed and reissued every contract year so that both the provider and buyer will have a better understanding if they are still in line with the initial contract. However, most clients doubt this type of procedure because they feel that the officer involved will be partial to the organization he/she is involved with.

5. Use benchmarking for renegotiations.
If all else fails and clients feel that benchmarking is a treacherous path to tread, they can still utilize information from benchmarking in renegotiations. Naturally, the client has to perform the process without the service providerís participation to avoid giving the latter the means to recalculate pricing and alter the descriptions of services.  

The way it is utilized in renegotiations is also essential because if done poorly, the provider could think that the clients are the ones performing doubtful practices.

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