Contract Renegotiations

Why rebid an outsourcing contract if you are satisfied with the current service quality and cost? If clients can be assured that their agreement is “at market”, they may prefer to negotiate a contract extension with the incumbent provider.

Some clients are considering expansion of scope with their incumbent provider, for example adding project management to a facilities management agreement, and they need market intelligence. Others are bound by internal policies to bid out certain contracts and want an advisor to run the rebid process with minimal disruption to the business. And some clients are not happy with their current provider and want to make a change.

We have developed a standard process to assist clients with second generation outsourcing strategies and rebids. The process begins with a contract abstract where we compare over 50 elements of the existing contract(s) to other recently negotiated contract terms and conditions. We then benchmark staffing levels, staff compensation, vendor costs and service provider fees and profit markups to our database of contracts and proposals. We test the reasonableness of our analysis by using building price per square foot benchmarks from BOMA and BenchCore.

The benchmarking results are one input to a sourcing strategy. Other inputs may include interviews with the client’s CRE management team, Service Assessment and Process Maturity surveys, interviews with service provider account team leaders and reviews of QBR reports, customer satisfaction surveys, audit reports, etc.

Even though the quality of the people, processes and technology offered by the major service providers has improved tremendously, we rarely find clients who are satisfied with all aspects of their relationship with their provider. Typical complaints are that the account team is not supported adequately by the provider’s “platform”, and that innovations and best practices to reduce costs or improve services are fewer than promised.

However, we are seeing many clients choose to renegotiate rather than go to market. Successful renegotiation can save the time and money needed to transition to a new provider, and the baseline costs and terms of the contract can usually be improved with providers who are eager to retain the business. And if the negotiations fail, the client has the option to go to market and include the incumbent in the process.

EXPERIENCE

Capstan was retained by a US bank to benchmark its integrated services outsourcing contract to market terms and assist in negotiating an extension of the agreement. Our work included benchmarking the existing contract, evaluating the service levels and the service provider’s dedicated staff.   Negotiations moved the contract from an agency agreement to principal model, with a savings glide path, improved rebate schedule, transition investment by the provider and other significant improvements in contractual terms and conditions.