Restructuring Outsourcing the Right Way
In order to be able to adapt to changing business and marketplace, restructuring has become an important part of outsourcing lifecycle - says TPI research.
Aug 25, 2006
In order to be able to adapt to changing business and marketplace, restructuring has become an important part of outsourcing lifecycle. Research firm TPI pointed out that, despite the intense competition amongst service providers for restructuring related revenues, many customers will fail to realize any additional material benefit. The problem is that too many companies look at contract restructurings too late and consider them from too narrow a perspective.
According to TPI for an effective restructuring it is important to outline the plan by defining the business drivers and objectives going forward. The restructuring projects should form an integral part of the organisation’s governance arrangements. Another factor to consider is that it is vital for the customer to create leverage before entering into any restructuring as the service provider has no incentive to concede margin or contract terms without good cause. Timing is also crucial and if a company hasn’t started the planning process two years in advance, there is significant risk that its options
will be constrained and its negotiating position compromised. Conducting a successful restructuring demands senior sponsorship and a dedicated project team.
According to TPI over the next few years billions of euros worth of outsourcing agreements are due for renewal and billions more will be subject to mid-term renegotiation.
2005 witnessed an unprecedented volume of contract restructurings 2005 witnessed an unprecedented volume of contract, both the volume and the value over euros 14 billion. TPI forecast that more restructurings are to come. Furthermore, many outsourcing contracts are and will be restructured during their initial terms.
TPI has identified three key customer goals that are driving much of the current volume of restructurings:
TPI said that underpinning these shifts is not only a change in customer preferences, but also an increasing diversity of competition, coupled with a levelling off of growth in the IT outsourcing market and a relative decline in the total value of new IT outsourcing contract awarded.
Customer retention will increasingly depend on an incumbent’s ability to offer a competitive proposition for every facet of the service and this will often require significant changes in price, contractual terms, scope and delivery approach from the original agreement.
TPI advised that a successful restructuring initiative should start with a review – or the creation – of a company-wide sourcing strategy. It is vital that the project does not simply centre on the need to fix a series of current commercial or service deficiencies. Rather, the restructuring should be informed by the overall strategy for, and needs of, the organisation. This should bring together the business strategy and its support requirements to define the appropriate service delivery framework – that mix of shared, devolved, in-sourced, outsourced, on-shore, nearshore, and off-shore capabilities under a coherent governance structure and delivered as an efficient, effective whole. It must also design the route map outlining how this sourcing strategy will be established over time.
The next step is defining the business drivers and objectives going forward, such as cost savings, service
improvement, contract flexibility and improvement. These must be balanced with both the company’s internal realities – including their business model, internal politics, risk tolerance and any regulatory issues – and external factors, such as the incumbent service provider’s business position, market dynamics and commercial best practice.
Organisations need to review all of their options thoroughly and objectively. Options include:
According to TPI for an effective restructuring it is important to outline the plan by defining the business drivers and objectives going forward. The restructuring projects should form an integral part of the organisation’s governance arrangements. Another factor to consider is that it is vital for the customer to create leverage before entering into any restructuring as the service provider has no incentive to concede margin or contract terms without good cause. Timing is also crucial and if a company hasn’t started the planning process two years in advance, there is significant risk that its options
will be constrained and its negotiating position compromised. Conducting a successful restructuring demands senior sponsorship and a dedicated project team.
According to TPI over the next few years billions of euros worth of outsourcing agreements are due for renewal and billions more will be subject to mid-term renegotiation.
2005 witnessed an unprecedented volume of contract restructurings 2005 witnessed an unprecedented volume of contract, both the volume and the value over euros 14 billion. TPI forecast that more restructurings are to come. Furthermore, many outsourcing contracts are and will be restructured during their initial terms.
TPI has identified three key customer goals that are driving much of the current volume of restructurings:
- Customers want a best-of-breed approach;
- Customers want options for offshore service delivery;
- Customers want improved access to service provider creativity, innovation & best practices.
TPI said that underpinning these shifts is not only a change in customer preferences, but also an increasing diversity of competition, coupled with a levelling off of growth in the IT outsourcing market and a relative decline in the total value of new IT outsourcing contract awarded.
Customer retention will increasingly depend on an incumbent’s ability to offer a competitive proposition for every facet of the service and this will often require significant changes in price, contractual terms, scope and delivery approach from the original agreement.
TPI advised that a successful restructuring initiative should start with a review – or the creation – of a company-wide sourcing strategy. It is vital that the project does not simply centre on the need to fix a series of current commercial or service deficiencies. Rather, the restructuring should be informed by the overall strategy for, and needs of, the organisation. This should bring together the business strategy and its support requirements to define the appropriate service delivery framework – that mix of shared, devolved, in-sourced, outsourced, on-shore, nearshore, and off-shore capabilities under a coherent governance structure and delivered as an efficient, effective whole. It must also design the route map outlining how this sourcing strategy will be established over time.
The next step is defining the business drivers and objectives going forward, such as cost savings, service
improvement, contract flexibility and improvement. These must be balanced with both the company’s internal realities – including their business model, internal politics, risk tolerance and any regulatory issues – and external factors, such as the incumbent service provider’s business position, market dynamics and commercial best practice.
Organisations need to review all of their options thoroughly and objectively. Options include:
- Renew the contract with the incumbent;
- Review and amend the current scope of services and/or the current service provider mix;
- Go to market via the RFP route;
- Terminate the contract and bring the services back in-house;
- A combination of the above.
TPI concludes, "Armed with clarity of purpose and direction and with sufficient time to execute the selected strategies, companies can approach a restructuring from a position of confidence and strength."