Outsourcing accounts payable typically costs less than managing it in house and allows organizations to focus on more value-added activities. With the average outsourcing agreement lasting five years, the end of the contract period is typically the best time to renegotiate…or is it?
According to a recent installment of Deloitte Debates, a series of debates on key business issues published by consulting firm Deloitte, the current conditions in the outsourcing market make it much more attractive to renegotiate contracts sooner rather than later. The article states that renegotiating a contract now can save an organization up to 25 percent on a large outsourcing agreement.
Deloitte Director Stephen Dunn says that many organizations are not aggressive enough when renegotiating their outsourcing contracts, often settling for fewer concessions than they could actually win. He believes the main reason is because organization’s typically approach a negotiation with a win-lose mentality, expecting their company to win and the outsource provider to lose.
However, Dunn believes more savings can be earned when the provider and the buyer work together to find cost savings. For example, he recommends focusing part of the negotiations on efficiency, rather than simply on pricing. “Suppliers will accept reductions in gross revenues if they can improve margins through efficiency gains,” he says.
The full article features a table breaking down two key negotiation strategies: playing hardball and going for the win-win scenario. Both strategies have positives and negatives. For instance, playing hardball involves benchmarking other outsourcing agreements and demanding lower prices. This strategy is tried and true, yet often leads to drawn-out, contentious negotiations.
Looking for a win-win scenario involves working closely with outsourcers to look for efficiency gains and consider new pricing models. While this method may lead to stronger provider relationships, it disregards much of the negotiating expertise housed in the procurement department.
