The client, a Fortune 500 business services company, was in the 7th year of a 10-year outsourcing contract with a vendor for mainframe data center services. While vendor performance met service level requirements, the company was interested in renegotiation of the contract in order to save money (beginning immediately) and to modify contractual terms so that it was better positioned for the future. In specific, the current contract-pricing model did not support the objective of moving most of the company’s processing from the mainframe environment to a client-server environment over the next few years. Additionally, current contract terms were not clear with regard to the vendor’s responsibility to support the company in its strategic IT planning, nor with regard to under what circumstances the contract could be opened up for renegotiation. Because of significant turnover in the CIO and IT infrastructure management positions, the company also had little historical understanding of the intent and form of the original contract. The company also had little experience overall in outsourcing beyond this deal. TBI was retained to assist the client by conducting an assessment of the current deal and planning and leading the contract renegotiation.
The TBI consulting team began by interviewing client and vendor personnel to reconstruct the history of the deal and its current status. This included gaining information about the current and past client-vendor relationship, operational history, and change order history. TBI consultants also undertook a review of the current contract terms and conditions in comparison to industry “best practices”, conducted a competitive benchmarking of cost and service levels, and audited past billings.
As there was no formal Statement of Work (SOW) or Service Level Agreement (SLA) in the current contract, TBI worked with the vendor and the client to create these to reflect current scope and performance goals. We also opened discussion with national.
The TBI team worked with the CEO, Director of Purchasing, and IT Leadership to consider findings and plan negotiation strategy. TBI consultants also prepared draft contract text to replace and supplement that in the original contract.
Benchmarking showed that the services were currently priced approximately 20-30% over market for the current SOW. The manner in which cost of living increases had been applied over the past term of the agreement was identified as a major contributor to the overpricing. The billing audit revealed irregularities in application of the pricing schedule, which also contributed to the significant overpricing. We also found that pricing had been substantially changed over the life of the contract, through work orders, signed by various IT managers of the client company, who often did not understand on-going cost implications of the change orders they executed.
Relationship management was identified as weak on the part of both the client and the vendor. The vendor was particularly disturbed over their inability to gain access to the client in order to communicate on any subject beyond normal day-to-day data center operations. The client, on the other hand, felt that vendor account representatives were not able to think strategically enough to help them accomplish change objectives and also felt that the vendor presence was fragmented, unable to present an integrated picture of its service offerings and the manner in which it could be of greater assistance to the company. Both parties sought a commitment from each other to improve relationship management.
The best practices gap analysis of the contract found that many aspects of it needed to be strengthened. TBI recommended changes in existing text as well as additional terms and conditions (e.g., termination clauses, gain sharing mechanisms, a performance credit process, etc.), as well as a clearer statement of scope and performance requirements. TBI also conducted briefings to prepare the client team for the renegotiation, and provided the vendor with a list of client contract concerns prior to the renegotiation session.
With TBI’s leadership, the client was able to negotiate a new 5-year contract with the vendor with greatly improved terms and conditions, contract clarity and reduced pricing. The contract was fully rewritten and included a pricing schedule and cost reporting requirements for the vendor that greatly reduced cost and improved client visibility into trends with regard to key components (i.e., for software maintenance, data storage costs, etc.) of their cost. In consideration of the client’s extension of the existing contract for 3 more years, and in return for agreeing to waive rights to sue the vendor for past over-billing, the vendor also returned $1 million to the client upon contract execution.
With regard to relationship management, the client committed to creation of a vendor relationship management position at an executive level and a program management structure providing for regular meeting with the vendor, while the vendor committed to assignment of an account executive team who could offer the client support resources to strategic ventures.
Initial year savings were 37%; savings in each subsequent year were 25%. The new contract was negotiated within the current business quarter, so that client savings could be shown immediately as the client desired. Both vendor and client considered the outcome “win-win” and felt that TBI’s objectivity and IT outsourcing expertise were what provided the impetus to make this renegotiation so effective.