Staying in a marriage has its benefits in the current climate, but at what cost?
Yes, the global growth sentiment is bearish—painful inflation, stocks nosediving, supply chain bottlenecks, war, and whatnot. Why take-on additional risks of switching vendors, reopening contracts, and teasing transformation in this climate, correct? Correct! But have you set boundaries for your comfort zone? Because, if you have not then chances are that you are blurring the lines between that of a practical bear and that of a victim.
Nearly 70% of the IT-BPS transactions that our advisors managed recently were sole-sourced or incumbency vendor renewals / rescoping. Fewer than 20% of these sole-sourced transactions rightfully became competitive when solutioning inertia, contractual impasse, or commercial impracticality was met. In the rest, the enterprises buckled. They sought refuge in notional improvements, tactical promises, and basis point benefits in the face of facts and figures.
Any relationship is worth sustaining and that applies to the contractual kind. However, if you do not set boundaries, you will never know when to rightfully step out. And that is just damaging, no matter the climate.
Buyer-Provider IT contracts have historically lagged the Analyst-Market Spiel and the same is true today. Transformation agendas are hard to push forward if existing contracts are still struggling with elementary issues.
Maturity of outsourcing contracts on the ground has lagged the analyst talk. We have observed that service providers are incorporating elements of analyst spiel and transformative agenda as part of their pitches while their existing contract are struggling with the basic transactional issues. It is imperative that service providers need to bridge gaps in capabilities around the base or fundamental services as they look to build next gen capabilities and incorporate them as part of pursuits and solutions.
Providers can get fixated with what they consider as value differentiators instead of understanding what the client’s value definitions are. Over the contract lifecycle, the value gap only tends to increase. With the anti-incumbency trend at its peak, Providers can benefit with a neutral and holistic assessment of existing client relationships to proactively cement and expand the account
A misalignment in the value definition between Service Provider and the enterprise leads to significant gap between the value delivered by provider and value realized by client. This gap only gets amplified over the contract life cycle.
In our experience, the value gap is driven by:
- Contractual: Inadequately informed/challenged solution and contracting
- Execution: Weak operational governance around pricing, delivery, performance, end-user experience
- Evolution: Lack of strategic governance, innovation, account management
Whether or not a benchmark meets your objective is contingent on how you approach a benchmarking initiative.
Benchmarking is an integral part of any contract evaluation for reassurance of the value on offer. However, for the benchmarking exercise to deliver real and meaningful value, it is important to have a holistic benchmarking approach in partnership with experienced advisor with access to relevant data with context details as well as practical deal experience.
Financial Engineering Mechanisms are now more important than ever.
With the increasing need for contractual and financial flexibility, financial engineering has become more important than ever in outsourcing contracts structuring. In our experience, winning bids reflect flexibility to align with buyer motivation.
Typical buyer considerations could include:
- Avoid upfront surge in expense
- Consistent spend or cost savings over the deal term
- Risk sharing by service provider till end of deal term
