July 19, 2022

10 Ways to Negotiate Lower Costs in Outsourcing Deals


Market and technology changes have created opportunities for companies to substantially reduce cost by negotiating and re-negotiating their managed services agreements and other outsourced services agreements. Here are 10 ways that you can seize those opportunities with present and future outsourcing suppliers:

  1. Reduce supplier cost. If you reduce a supplier’s cost, the supplier can lower its charges while preserving its profit. You can reduce a supplier’s average cost per unit by aggregating volumes or accepting generic solutions. You can reduce a supplier’s total costs by reducing requirements. For example, one of our clients cut its in-scope IT costs in half by replacing its world-class internal service levels with “good enough” service levels. 
  2. Reduce risk premiums. You can reduce a supplier’s risk premium by accepting more risk. On pricing terms, for example, you might allow cost-of-living and currency fluctuation adjustments or even re-pricing options. Operationally, you might forgo technology currency or continuous improvement commitments, planning to pay for needed improvements through change orders. On legal terms, you might accept a greater measure of exclusivity or weaker commitments.
  3. Allow transformative change. Suppliers today are offering tremendous cost savings—30 percent or even 50 percent—if allowed to standardize and automate manual processes and deliver using an ecosystem of SaaS and other cloud providers. Done well, with strong commitments as to the “to be” state, this could also advance your digital transformation agenda. However, transformative change can impose costs and risks on customers, so an investment in planning and contracting is required to do this well.
  4. Commit to more collaboration. Instead of asking a supplier to take full responsibility for delivering in-scope business functions, commit to providing resources to help the supplier perform. This can reduce cost if you can provide that assistance for a lower cost than the supplier can provide it to you. Take care, however, to price the deal so that your company does not pay the supplier for work that your company then does as collaborative assistance.
  5. Leverage competition. A well-run, competitive sourcing process can deliver both the value creation of a negotiation and the competitive pressure of an auction. As a result, cost savings accrue more to your company than the supplier. Effective multi-sourcing can continue this competitive pressure while reducing risk.
  6. Provide non-cash compensation. Consider ways to help your supplier increase its profits from other customers. For example, you could allow the supplier to use your data to train its machine learning platforms, to use innovations developed for you for other customers, or to use your name in its marketing. You could agree to act as a pilot customer for new products or, perhaps, if certain metrics are met,  as a reference customer. You could even publicly grant awards to suppliers who perform well. 
  7. Pay in future years. You can reduce first-year costs by, for example, spreading one-time costs over the life of the transaction, selling assets to the supplier for credits, or agreeing to a longer contract term. Termination charges will go up and there will be an implied interest rate on the deferred payments. However, there are years—and this may be one of them—when those might be small prices to pay.  
  8. Reduce unanticipated charges. During negotiations, it can be tempting to just “get it done” and sort out the details later. Unfortunately, haste often makes waste. Sorting out details after signing with a cost-pressured supplier generally means that value leaks to the supplier. Never sorting out the details means that your contract has gaps and ambiguities that the supplier can use to increase its charges. The solution is to invest the time and resources required to get a well-crafted contract that secures a clear commitment to delivering what you need, at acceptable performance and compliance levels, and for a reasonably firm price.
  9. Reduce related costs. Saving money is not about getting the lowest contract charges—it’s about reducing total cost. Suppliers can reduce their “headline” charges by pushing costs to customers. Your financial analysis needs to include costs of fulfilling your responsibilities, paying third-party charges, complying with relevant laws, paying taxes, providing facilities, addressing employee obligations, and so forth. That is only possible if the contract clearly identifies your costs.
  10. Continue to improve the deal. You never know all you would like to know when you are negotiating a contract. As you get more information, modify the contract to maximize value.

Implementing these ideas requires an investment of time and resources by sourcing, financial, operational, technical and legal resources. It requires management commitment to deciding how to value factors such as service, risk, and relationship. Now is the time to get a mandate for that investment and to achieve those savings.

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