End-of-term Strategy Archives

Preparing for End of Term: Key Considerations for Today’s Dynamic Environment | Virtual Roundtable

July 27, 2017

Thursday, July 27, 2017 | 11:00 a.m. – 12:30 a.m. ET

Preparing an end-of-term strategy involves critical analysis around renew versus recompete versus re-sourcing. Current Market dynamics, including the rotation to digital and geopolitical unrest, are significantly impacting the market, making contracting even more complicated.

To help sourcing and procurement executives nearing end of term on major outsourced contracts, this session will provide an update on current market trends and practices, followed by a group discussion among participants on how they are approaching their sourcing strategies and negotiations, including key considerations and best practices, among other topics.
Who Should Attend
Global services sourcing and procurement executives in enterprises nearing end of term in their key outsourced contracts.

What You Will Learn
This session will help participants develop an understanding of the key considerations, best practices, and next-generation digital levers to manage end-of-term planning and execution.

Request to attend

Who Will Win the Prey Game in the US$76 Billion IT Deal Renewals Market? | Sherpas in Blue Shirts

March 24, 2015

With the rise of smart machines and robotic technologies replacing labor arbitrage, multi-sourcing becoming a norm, and “as-a-service” models increasing in adoption, the IT services (ITS) market is undergoing radical change. And it could wreak havoc on – or mean opportunities for – ITS providers nearing deal renewal time.

It’s abundantly clear to us that multiple hunters over the last few months have been eyeing big portions of the US$76.3 dollars in IT services contracts soon to be up for renewal. And if they’re not careful, it could mark the end of millions or billions worth of business for several companies. The verticals primarily at stake are BFSI, Healthcare, and Energy and Utilities, which have a combined share of more than 55 percent of the total pie.

But before we talk about how these providers can fend off their attackers, let’s take a quick look at the state of the market, per our recently released Report on Upcoming Contract Renewals (ITS) – 2015:

BFSI continues to remain the dominant vertical in the total value of deals expiring in ITS; 94 percent of the deals in this sector are with large service providers (with revenue of greater than US$5 billion)
Western Europe is the dominant market for expiring high value IT deals, accounting for 55 percent of the total number of expiring billion dollar deals
Infrastructure services are included in the scope of more than 77 percent of the total value of ITS deals, and 55 percent of these deals are due to expire over the next year. Data center and network services are the primary components in more than 70 percent of the total expiring ITS contracts
Pure application services (AS) comprise 25 percent of the total value of the entire ITS pie. Large service providers of BFSI and Travel and Transport support services will drive 60 percent of the total AS renewal spend over the next two years, concentrated primarily in North America and Western Europe. In fact, the highest valued IT deal expiring in the next two years is a pure AS deal with a French Travel and Transport provider

With so much renewal money up for grabs, who will win the hunting game? A David versus Goliath story is currently playing out in the deal renewal industry. Incumbent service providers want to expand their footprints across clients and fend off the attacking competitors. Attackers are desperate to penetrate newer opportunities by eating away share from the incumbents.

The reality is, the incumbents have a lot more to lose than the attackers. Given high anti-incumbency sentiment in the deal renewal market (~40 percent of deals are not renewed with incumbents), these providers need to take a serious look at their traditional deal renewal strategy, taking into consideration:

Enterprises are no longer willing to sign up large IT services deals spanning multiple years due to factors such as vendor lock-in and lack of transparency; as a result, best-of-breed solutions may emerge as the better option
These massive service contracts have tapered off over the last decade, since customers are now more willing to disaggregate the requirements into different IT towers or services
Enterprises realize that these large deals may not be able to flex to changing business requirements.

At the same time, attackers can’t reduce their efforts and investment in winning new clients. Despite all the challenges with incumbents, enterprises typically default to them fearing cost of change management and disruption. The onus lies on the attackers to demonstrate value beyond niche positioning or price aggression. Attackers need to invest early in building credibility with the enterprises. They need to communicate value in tangible terms beyond cost savings. And they need to make themselves visible to gain mindshare of their target clients. It’s a cultural overhaul where attackers must promote both their vision and their delivery capabilities in the market.

It is difficult to predict what lies ahead in this hunting game. But there will certainly be winners and losers. If you’re an IT service provider, will you be one of the winners?

That’s My Girl, but It Ain’t My Truck | Sherpas in Blue Shirts

November 21, 2014

The cowboy song by Rhett Akins, “That Ain’t My Truck,” where he discovers his girl has left him for another guy, reminds me of the anti-incumbency bias occurring in today’s global services marketplace. What’s causing clients’ infidelity to their incumbent providers?

I believe many incumbent service providers find themselves displaced today because of three factors.

Services that clients once viewed as value are now just a commodity. Almost all services commoditize over time. And at that point a service that was once a differentiation of the provider no longer is different from other providers’ offerings.

Client and provider interests become unaligned. When interests aren’t aligned, the client comes to believe the provider delivers services in a manner that benefits itself rather than working for the client’s benefit.

The service provider takes the relationship for granted and the customer sees it increasingly as day-to-day business. Figuratively speaking, the provider forgets to bring roses. I’ve blogged before about this relationship phenomenon where clients tell Everest Group they get no innovation (continual added value) from their providers.

Incumbent providers should keep in mind that Taco Bell is not fine dining and a trip to Galveston is not the same as a trip the south of France. Just as with relationships between men and women, commercial relationships also need forward momentum. Without making an effort to build a deeper relationship, it will go stale or even go backward. Management changes and employee turnover in the provider organization aggravate this situation.

Clients now have a variety of options when it comes to service providers. Incumbent providers that don’t want to find their clients with another provider’s “truck” are wise to focus on the above three factors.

Also see our complimentary viewpoint, Rising Anti-Incumbency in Outsourcing: Breaking Up Is Not Hard to Do.

Photo credit: Don O’Brien

There’s Heat to the Tune of Nearly US$9 Billion in the Oil and Gas Outsourcing Market | Sherpas in Blue Shirts

September 16, 2013

A whopping US$8.5 billion worth of IT and business process outsourcing deals are up for renewal in the next two and a half years, with 57 percent of this value up for grabs in 2013-14 (see the image below). This is a huge opportunity for service providers and buyers, as the oil and gas industry is going through a dynamic phase and both the sell-side and buy-side players are evolving their strategies and approach to IT and business process services delivery.

Oil and gas majors are facing declining profitability, while their revenues continue to grow. This indicates the significant cost pressures they are facing. Two possible reasons behind this are the rising cost (rising at a CAGR of 3 percent for the past several years) of converting new discoveries into production, and fluctuations in demand from large consumers. Other key challenges oil and gas firms are experiencing include:

An aging workforce, which is leading to the scarcity of skills in this sector and knowledge management issues
Increasing operational efficiency to combat growing cost pressures
Deriving greater output from their assets by leveraging technology

These challenges, coupled with dynamic nature of the sector, have led to a shift in buyers’ approach to outsourcing. Early adopters of outsourcing are now rebalancing their sourcing portfolio and, hence, making a cautious move towards further outsourcing. Buyers’ expectations from service providers are also changing, and they are demanding non-linear models in their outsourcing relationships, i.e., gain-share mechanisms.

Service providers are also stepping up their game plan on several fronts in order to grab a bigger piece of the oil and gas pie. First, they are focusing on developing domain expertise in order to support the need for integration of operation technology with information technology in this sector, as buyers are looking for such an integrated approach to derive more output/performance from their assets. They are leveraging domain expertise to create cost-effective, plug and play solutions that reduce clients’ time-to-market. And they are using their domain expertise to build robust knowledge management systems, thereby tackling buyers’ aging workforce issue. While service providers have historically followed an inorganic approach (mergers, acquisitions, and alliances) to develop industry-specific knowledge and they continue to do so, many are also adopting an organic route. They are hiring talent (both entry-level and experienced) directly from the industry or relevant universities, and are investing in institutionalizing internal training programs.

Second, service providers are looking to serve oil and gas firms in their expansion into newer geographies, such as Latin America and the former Soviet Bloc, which are emerging as new oil fields and are looking to expand their footprint and language capabilities to serve client needs.

Third, service providers are embracing disruptive technologies, such as mobility, cloud, analytics, and social media in their solutions for the oil and gas sector. Buyers are demanding these to gain a competitive edge. These technical advancements present a big opportunity for service providers to create solutions and ready-to-use platforms for this sector.

Overall, it is an interesting time in the oil and gas industry, especially for service providers to unlock their potential. While we provide a short-term view of the outsourcing deals’ potential, providers must develop long-term strategies and make investments to capitalize on the opportunities that lie ahead. Yet, given the value at stake in the short-term, it is unlikely service providers will fail to recognize these undercurrents and miss the bus.

To learn more about this topic, please read our recently released report, “Outsourcing and Offshoring Trends in the Oil and Gas Sector.”

Video: Key Highlights from Everest Group Report on Impending Outsourcing Contract Renewals | Sherpas in Blue Shirts

June 12, 2012

In June 2012, Everest Group released a flagship report titled “Impending Contract Renewals – Back to the Future.” The report covers in extensive details trends around outsourcing contracts that are reaching end of term during the period between April 2012 and September 2013. Analyses performed include industry, geography and service provider category trends.

Everest Group’s analyst Soumit Banerjee shares some of the key headlines from the report.

Are You Ready to Renew Your Vows With Your Provider? | Sherpas in Blue Shirts

June 15, 2011

The unfortunately all too frequent seven-year itch – “the spice is gone…should we stay together?” – doesn’t happen just in personal relationships, it also happens in outsourcing relationships. Past the mid-point of a 10-year outsourcing relationship (or whatever the length of the agreement) buyers and service providers often struggle to identify how to maintain the health and happiness of their contractual relationship. Buyers are interested in increasing the level of commitment from the provider, in the form of increased productivity or continuous improvement initiatives. However, the provider is often challenged with supplying service improvements and decreasing the cost of service delivery at narrowing profit margins. With the remaining years in the outsourcing relationship, what relationship modifications are required to ensure mutual benefits for both parties?

Organizations should review their changing landscape, organization, and business requirements to identify their long-term strategic objectives so they can decide on the model that is most appropriate for delivering their services and the supporting sourcing option(s) to help achieve their goals. For example, the fact that an organization is currently in an outsourced relationship does not require that it stay in one. If the organization has the internal capabilities, access to the necessary resources, and time to implement the strategic initiatives, engaging in a sourcing relationship may not be strategically (nor potentially financially) beneficial. However, an organization that is potentially looking for greater flexibility and scalability, access to new skills and resources that are not locally available, or to capitalize on new technological trends may consider partnering with one or more suppliers who have the ability to support the organization’s objectives due to lack of in-house capabilities.

An organization that chooses to engage in a relationship with a third-party service provider should ensure alignment for the long-term: strategic objectives (i.e., business and organizational objectives), cultural fit (i.e., mission and values), and solution requirements (i.e., feasibility and adaptability of the service delivery model to meet the organization’s needs.) An understanding of all three factors is imperative in determining the future strategy of the functional organization and shaping the future direction of the current outsourcing relationship.

What is the right change for your relationship?

There are several options you can consider:

1. Don’t rock the boat (i.e., Renew):

After an honest look at your relationship, you realize that the ”same old, same old” is actually working for you
This is akin to renewing the sourcing relationship where you and your incumbent provider agree to continue with the existing contract with minimal changes

2. Face lift (i.e., Renegotiate):

Following discussions on trade-offs and compromises, you and your partner decide that some tweaking to your old routine is required in order for your relationship to continue
Similarly, you and your incumbent provider agree to modify one or a number of limited elements of the outsourcing contract, e.g., price and service levels

3. Overhaul (i.e., Restructure):

Small changes are not going to cut it. In order to make this relationship work going forward there must be some fundamental changes
In a strategic sourcing relationship, you may realize that while you’ve had a provider that has offered value over time and will continue to do so, it must be under a new set of circumstances. In this case, you and your provider can undergo a strategy exercise to restructure the services being you’re receiving to ensure that they align with your long-term objectives

4. Out with the old and in with the new (i.e., Re-compete):

You’ve talked it through with your partner and realize the relationship is not going anywhere. You need someone more supportive and responsive to your needs, and decide it’s time to see other people
The decision to re-compete your delivered services is driven not only by cost, but also by your organization’s long-term strategy. If you assess that your current provider is not capable of supporting your cost and strategic goals, it’s time to start seeing other service providers

5. It’s not you, it’s me (i.e., Repatriate):

You’ve assessed your relationship, and discovered that you are happiest being on your own.
Over time, as your organization evolves, you may find yourself in a position where your long-term goals are best met by bringing services back in-house. This can be the result of M&A activities, a fundamental shift in business strategies, etc.

All kidding aside, buyers must go through a complex exercise when approaching the end of their strategic sourcing relationship. The initial step is to understand their organization’s 10-year strategies and objectives, then begin assessing the current relationship for fit. We typically find there is no single correct answer and, instead, the resulting engagement strategy is a hybrid of the above options. As the marketplace embraces new technologies, the multi-vendor answer is becoming increasingly common. Unlike in personal relationships, it may be beneficial for an organization to have more than one sourcing partner to maintain competitive tension and to optimize the fit with the buyer’s strategies. Organizations can choose their flavor of service providers, a Tier 1, niche, or offshore provider, depending on their objectives and requirements. However, they need to balance the complexity of managing a multi-vendor environment against the benefits provided by each vendor. We strongly encourage full disclosure and consistent communication in a multi-partner model to ensure smooth day-to-day operations and successful service delivery from both/all providers. After all, a little competition never hurt anyone.

Growing Renewals in Asia: Time to Plan Ahead? | Sherpas in Blue Shirts

May 9, 2011

As Indian service providers announce their results for the year, one can’t but be amazed by their spectacular growth. For fiscal 2011, TCS’s annual earnings grew by 29 percent year over year (YoY), and Wipro’s IT services revenue grew by 19 percent YoY. While North America and Western Europe have traditionally fueled growth for the Indian heritage service providers, the focus is increasingly turning to Asia to capitalize on the growing economic shift.

In this context, the next several years are set to be quite interesting for the Asian markets, as we estimate that more than 500 first generation ITO and BPO contracts, worth US$25-30 billion, are up for renewal in Asia (Middle East, India and South East Asia) through 2014.

As we ran an analysis of potential renewals through our deal databases, some interesting trends emerged:

India, Malaysia, Singapore, Saudi Arabia, and Israel, in that order, have the largest renewal opportunities; and India is the largest market by far, possessing 50+ percent of the potential renewals by value.
In India, a large number of early stage telecommunications deals are coming up for renewal; in the rest of the region, financial services will likely dominate renewal activity.
IT contracts will likely contribute nearly 80 percent of these renewals, with infrastructure being the most significant component.
Clearly, large buyer enterprises (Forbes 1000 firms or private firms with revenues of over US$5 billion) will dominate these deals, except in Middle East Asia, where there is a greater presence of small-to-medium sized contracts.

What makes renewals unique in the Asian market?

First, over the last decade, Asia has undergone a much more rapid change in service provider capabilities than developed markets. Today, most global IT-BPO providers have sizeable Asian market practices, and have brought global offerings to service regional buyers; a decade ago, it was just a select few.

Second, buyer maturity in the region has increased significantly. Asian buyers today have had multiple deal experiences with providers, and consequently understand sourcing and governance in far greater depth than in the early 2000s. Today, transformational deals are not unheard of, and sophisticated service management frameworks are the norm, not the exception.

Third, consider changes in the global context that also affect the environment in Asia: the growing adoption of virtualization; the emergence of the Cloud; enterprise-scope BPO services; and consolidations in the provider landscape.

Together, all these factors make the case for a careful look at contractual parameters as end-of-engagement terms approach. Typical end-of-term alternatives include:

Renew: Resign the existing contract with minimal changes.
Renegotiate: Modify a limited number of elements of the contract.
Restructure: Rethink the structure of key contract provisions and key business terms.
Recompete: Terminate the existing contract and enter into a fresh competitive bid process.
Repatriate: Terminate the current contract and bring previously outsourced services back in-house.

As Asian buyers consider these options, they need to carefully evaluate market capabilities (given significant market changes), and take a closer look at deal robustness to ensure that market best-in-class service management/contractual frameworks are incorporated. This implies that restructuring and recompeting are very real options in the Asian context.

Everest Group’s experience indicates that end-of-term evaluations take nearly six months in typical global deals. Given added complexities in regional deals, buyers would be wise to begin their evaluations up to a year in advance.

Historically, it is not uncommon to see buyers continue with their incumbent service providers. While some fail to leverage the market effectively, others get bogged down with challenges of repatriation or risks of changing service providers (such as business continuity risks, contractual lacunae for transition-out or incumbent provider hold-up). However, heightened competition, changing service provider landscape, newer delivery models (e.g., cloud) and increasing maturity in the Asian and Middle Eastern markets could well change this going forward.

End of Term, Which Way Next? | Sherpas in Blue Shirts

December 16, 2010

As many of you are aware, I am afflicted with a love of motorcycles, specifically Harley Davidson’s. So during the limited time I’m home, I spend as much of it as possible riding. My wife usually joins me on the bike, as does Pip, our Yorkie, who sits on my wife’s leg with his face in the slipstream, absolutely loving it. For anyone concerned about Pip’s safety, no worries…we have him outfitted in a do-rag and Doggels (goggles for dogs), and wearing two harnesses with safety straps attached to me so he can’t fall off.

Recently, the three of us were riding and approached a ‘highway ends’ sign. Technically the highway ended but the road didn’t; rather, we were provided options for other highways and local roads. We were approaching the decision point at about 60 mph and had to think about what to do next. Our decision was impacted by various factors: 1) how the bike was running; 2) how tired we were getting; 3) how much longer we wanted to ride; 4) what the weather was doing; and 5) whether we wanted to take the longer lake road or the inland route, which was less scenic but closer to home.

What we faced is very similar to the thinking required when developing an end of term strategy (ETS). You should consider an ETS not as the end of the road but as a series of new roads, any of which you can take. And you determine your going forward roadmap by understanding the roads that lie ahead, establishing how to go about making the road choice decision, and ultimately selecting the one that is right for you –whether old, new, still under construction road or an off road build-it-your-selfer.

The common set of factors you must consider when developing your ETS include: 1) how the relationship has been performing and whether or not it is still productive; 2) what needs to be changed in the services scope expanding/contracting; 3) how the sourcing objectives need to change to align with current business objectives; and 4) what market, technology and delivery model changes need to be addressed.

When facing an ETS, there are typically six roads for you to consider:

Renew: Sign on for the same contract, terms and conditions, pricing structure, and service levels, with minimal changes.

Renegotiate: Modify one or a limited number of elements in your outsourcing contract, e.g., price and service levels.

Restructure: Rethink the structure of key contract provisions, key business terms, and in-scope processes.

Re-compete: Terminate your existing contract and enter into a competitive bid process with potential suppliers, and select one or multiple providers to replace the current services agreement.

Repatriate: Terminate your current outsourcing contract and bring previously outsourced services back in-house.

Hybrid of the above strategies: In a multi-process outsourcing agreement, certain processes may warrant different strategies so, in effect, the overall strategy is a combination of the various strategies.

One key, and often misjudged, factor is when to develop your ETS. Waiting too long can be disastrous because you can run out of road. You need to leave adequate time not only to develop the strategy and roadmap but also to make course corrections as you may well face substantial challenges during implementation. For example, there may be difficulties in execution, such as a failure in negotiations of restructuring an existing relationship, or in the transition of services from the incumbent to a new supplier. In most cases, the best time to start the development of the ETS is 18 to 24 months before contract expiration. This timing may change depending on the outsourced processes and the complexity of the environment.

The ETS creation process should be collaboratively undertaken, with the buyer and supplier, and structured to drive more value, both financial and operational, into the relationship. If your organization plans ahead, and invests the proper time and resources, it should be able to develop an ETS that drive the most appropriate decision on the best direction to take – one that is in alignment with its current and future objectives.

Back to our motorcycle ride with Pip…we took the lake road and kept riding.

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Tag: end-of-term strategy