To Recompete or Not to Recompete

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        The Issue: To Recompete or Not to Recompete?
        How to Ensure IT Outsourcing Value in the Public Sector
        by: Charles Collier, Managing Director, EquaTerra
            Karl Kaiser, Client Executive, EquaTerra




        In the public sector, many organizations and            The Details
        agencies that are several years into their IT           Under pressure to demonstrate value after several years in an IT
        outsourcing relationships are questioning               outsourcing relationship, many public sector organizations and
        whether the contracts they initially negotiated still   agencies are thinking about recompeting their outsourcing
                                                                contracts. The dilemma is especially topical for those
        serve them today. In the absence of any formal
                                                                entities with contracts expiring in the next few years. The
        governance or relationship management structure,
                                                                City of Minneapolis, for example, outsourced its IT assets in
        or when the governance model is flawed or weak,
                                                                December 2002. Now, some two years shy of its seven-year
        many decide to recompete their contracts with
                                                                contract completion date, the city is considering a change
        their external service provider. But this can be very
                                                                to accommodate its new business needs. Meanwhile, the
        time-consuming and costly, ultimately, creating
                                                                Commonwealth of Pennsylvania is reaching the end of a 10-
        a negative return on investment. A practical            year contract that consolidated about 20 state data centers.
        alternative is for the organization to conduct an       And California State University is nearing the expiration of an
        objective review of the existing relationship in        outsourcing agreement for the data center operations of its 23
        tandem with the service provider, ideally under         campuses.
        the guidance of an objective, third-party sourcing
        advisor, and renegotiate the agreement with the          Recompete
        goal of optimizing the relationship to meet the          A competitive bidding process that organizations use to
        needs of both parties. Key elements to review            consider new service providers for existing outsourcing
        include: relationship health, perceived value of the     initiatives.
        agreement, performance compared to the original
        business case, performance against Service Level        The maturation of an ITO contract frequently causes a public
        Agreements (SLAs), contract terms, pricing, and         sector organization to question whether the service delivery
        the ability to meet needs not originally anticipated    terms it negotiated several years ago are providing enough
        in the initial agreement. Such a review and             value today. Thus, it may seem like a good option to entertain
        renegotiation, which can be completed in a couple       proposals from other service providers. But in the process-
        of months versus a year or more for the recompete       intensive public sector, a recompete is extremely time-
        process, is a comparatively inexpensive and high-       consuming, costly and frequently unnecessary. As long as
        value way for organizations to get the most from        the overall relationship between an outsourcer and its service
        their outsourcing relationships.                        provider is intact, a better option may be for the contract to
                                                                be reviewed and renegotiated.
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          A vendor switch in the public sector involves significant
          operational difficulties, time and costs – all of which
                                                                                                        Updating an Aging Contract
                                                                                                        Updating an Aging Contract
          can cause a negative return on investment. Among the
          challenges are:
                                                                                                           RELATIONSHIP HEALTH
                                                                                                           RELATIONSHIP HEALTH
          •     Request for proposals (RFPs). In the public sector,
                                                                                              INTACT
                                                                                               INTACT                                 BROKEN
                                                                                                                                      BROKEN
                organizations must start the RFP process well in advance
                of a contract’s expiration date – and that’s just the
                development of the request. Only after that can the
                laborious evaluation and deliberation begin.
                                                                                           RENEGOTIATE
                                                                                           RENEGOTIATE                               RECOMPETE
                                                                                                                                     RECOMPETE
          •     Transfer of assets. Over the course of an outsourcing
                relationship, a service provider, as an integral part of the
                client organization, usually has acquired much of the
                buyer’s IT assets. In the event of a vendor switch, these           An Alternative to Recompeting
                assets must be transferred to the new service provider.             Many public sector entities simply do not have effective
                In the process, organizations incur substantial time and            governance structures, so they may not know how to
                costs awarding a new contract and disentangling from                optimize their outsourcing relationships. Outsourcing
                the current one.                                                    governance refers to the people, processes, supporting tools,
          •     Service transition. Changing service providers                      and third-party support services that collectively enable
                can significantly disrupt service levels and customer               an organization to achieve the intent of the outsourcing
                satisfaction. As initiatives fall through the cracks                deal. Lack of governance can contribute to significant value
                during the transition, multiple years of service provider           leakage. In the public sector, unnecessary recompetes are a
                knowledge are lost, and it takes time for a new service             prime example.
                provider to learn the organization.
                                                                                    If the organization hasn’t been evaluating the performance of
          Given the significant costs of the recompete process in the public        the service provider through proactive governance processes
          sector, it should only be considered if the relationship is truly         since the inception of the agreement, it must begin doing so
          broken. For example, a recompete may be in order if a breach              18 to 24 months before the end of a contract to ensure it’s
          of contract threatens a customer’s data security or if severe             still meeting business needs. In addition, if an organization
          performance problems damage the customer’s business and                   undergoes significant change, such as a restructuring, new
          erode confidence in the service provider’s ability to deliver. Further,   management, or a major change in size or volume, then
          broken relationships are generally adversarial. If a customer and         it should determine whether the original contract terms
          service provider have disdain for each other, or if they spend more       accommodate the new requirements. In either case, finding
          time pointing fingers and arguing legalese in the contract than           that the terms of yesterday are no longer adequate today
          finding solutions, then it may be time to divorce and recompete.          doesn’t mean organizations need to replace their service
                                                                                    providers. It usually means they need to update their
          San Diego County is one organization that found it necessary to
                                                                                    agreements, which is a comparatively streamlined process.
          recompete its $644 million IT contract, which at its inception in
          1999 was heralded as one of the largest municipal outsourcing             Steps to take when evaluating and updating your contract
          deals in history. Following problems that were widely attributed to       with your current provider include:
          poorly crafted service level agreements, the county issued its RFP        •   Diagnosis. Perform an objective review of the existing
          in 2005 and awarded a new, seven-year contract to a different                 agreement, identify the root causes of dissatisfaction
          service provider in 2006.                                                     and determine what’s missing from the contract.
                                                                                    •   Benchmarking. Conduct objective market comparisons
                                                                                        of service level agreements, pricing and other
                                                                                        contractual terms.
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          •     Modeling. Explore various scenarios, supported by            access and participation, and keeping the focus on objective
                market data, for enhancing service delivery.                 data, rational dialogue and converging mutually acceptable
          •     Renegotiation. Identify corrective actions and               outcomes. Most importantly, while the client team may
                renegotiate the contract.                                    include people who have been through one or more
                                                                             outsourcing processes, a sourcing advisor provides the skills
                                                                             and knowledge harvested from hundreds of outsourcing
           Top Tip
                                                                             advisory engagements.
           If you find that the terms of your outsourcing contract
           are out of date, you don’t necessarily need a new service         The relationship review-and-renegotiation process typically
           provider. You may need a new contract. A third-party              is completed in eight to 12 weeks versus the better part of a
           advisor, with deep market insights and specialized                year or longer for a public sector recompete. That makes it a
           knowledge and skills that have been harvested from                relatively inexpensive and high-value way for organizations to
           advising on scores of outsourcing engagements, can help.          get the most from their outsourcing relationships.


          Taking the Renegotiation Path                                      The Advisor Perspective – Critical Points to
                                                                             Consider
          Renegotiation should be presented to the service provider as
                                                                             Organizations in the public sector that want to optimize
          a positive opportunity – one that will result in an extended
                                                                             their aging outsourcing contracts should consider several key
          agreement better aligned with both parties’ interests. When
                                                                             factors:
          the renegotiation is managed thoroughly and correctly,
          service providers can retain revenue and profitability, while      •   As a contract nears expiration, or about five years into
          buyers can achieve updated performance standards on goals              a seven-year deal, organizations should revisit their
          like productivity, data security and regulatory requirements.          agreements and determine whether updates are needed
                                                                                 to reflect current business requirements.
          To ensure the most valuable outcome, the actual negotiators        • Due to exorbitant cost, time and process considerations,
          should be individuals who are truly skilled and experienced          organizations should only consider recompeting the
          in the “art of the deal.” They may be inside the organization,       contract if the buyer-provider relationship is adversarial
          but it is rare to find in-house experts who have negotiated          and broken beyond repair.
          multiple outsourcing agreements of similar scope in the past
                                                                             •   When the relationship between the two parties is intact
          and will negotiate on behalf of the entire client organization
                                                                                 but the terms need to be updated, a better option is to
          rather than representing a specific interest group.
                                                                                 objectively review and renegotiate the agreement with
          The vast majority of public sector entities entering into a            the help of a third-party advisory firm that possesses
          renegotiation will be best served by engaging a third-party            the skills and knowledge from in-depth involvement in
          advisory firm to facilitate and manage the renegotiation on            hundreds of outsourcing engagements.
          their behalf. In the same way that sourcing advisors make          •   Helping both parties evaluate options for improvement,
          critical contributions to the original outsourcing agreement,          an independent advisor can objectively benchmark
          any renegotiation similarly will benefit from their involvement.       the relationship, determine what’s missing, run various
          The sourcing advisor’s contribution is to provide process              scenarios for enhancing satisfaction and develop an
          discipline, tools and templates for collecting, collating and          actionable plan.
          modeling data, as well as subject matter expertise around
          scope, market information, service levels and performance           Objective Relationship Analysis
          management, specialist negotiations and renegotiations.             One of several available options is EquaTerra’s Governance
                                                                              Healthcheck, a consulting service that helps outsourcing
          While the specifics of the role vary slightly, the independent
                                                                              buyers and providers diagnose and repair relationship
          advice an advisor brings to the table is important in
                                                                              problems. For more information go to: http://www.
          managing the process through completion, providing market
                                                                              equaterra.com/governance-healthcheck.aspx
          insights, delivering improved service provider executive
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    Spacing around the word marque and positioning statement
          Conclusion                                                                           About EquaTerra
          In the public sector, where it’s often more about process                            EquaTerra sourcing advisors help clients achieve sustainable
          than the business case, recompeting a current outsourcing                            value in their IT and business processes. With an average
          relationship doesn’t always make the most sense for ensuring                         of more than 20 years of experience in over 600 global
          continued value. Due to the cost and time investment in                              transformation and outsourcing projects, our advisors offer
          the recompete process, along with service disruption and                             unmatched industry expertise. EquaTerra has in-depth
          declining performance risks, a recompete can often cause                             functional knowledge in Finance and Accounting, HR, IT,
          more problems than solutions. In many cases, outsourcing                             Procurement and other critical business processes with
          agreements simply need to be updated or optimized to meet                            advisors throughout North America, Europe and Asia Pacific.
          changing business requirements. Third-party advisors are                             Our people are passionate about providing objective, conflict-
          available to help – at a fraction of the time, cost and process                      free advice to our clients, which has fueled our exponential
          required for a recompete.                                                            growth over the past four years. We help clients achieve
                                                                                               significant cost savings and process improvements with
                                                                                               outsourcing, internal transformation and shared services
                                                                                               solutions. It is all we do.

                                                                                               For more information regarding this whitepaper, please
                                                                                               contact:
                                                                                               •    Charles Collier at �1 312 540 045���
                                                                                                    Charles.Collier@EquaTerra.com�� or
                                                                                               •    Karl Kaiser at �1 952 401 �582��
                                                                                                    Karl.Kaiser@EquaTerra.com

                                                                                               For more information on EquaTerra, please contact Lee Ann
                                                                                               Moore at �1 �13 669 9292�� Leeann.Moore@EquaTerra.com��
                                                                                               or visit www.EquaTerra.com.




          Copyright © EquaTerra 200�. All rights reserved. The prior written permission of EquaTerra is required to reproduce all or any part of this document, in any
          form whether physical or electronic, for any purpose. 3011_09200�.

				
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