Nico Boot, Executive Director Europe and Asia Pacific

Most organisations make the mistake of drawing up new contracts based on negative experiences in the past. A better way to determine the appropriate option when a contract comes to an end is to carry out the final annual review of the sourcing strategy, look ahead at future needs, and look back at what has been provided throughout the life of the contract. Objective decisions can then be made regarding whether to continue (and potentially extend), divide, or terminate the contract with the current service provider.

In addition to involving business management, don’t forget to involve the service provider in the re-let process and to carry out parts of the analysis together. Very often the service provider has information which the organisation doesn’t have itself. It’s also beneficial to know how the service provider views the contract period that has just passed and what they have learned from it.

A key to outsourcing success is governance. This doesn’t just mean rules and procedures, but more specifically, the desire to improve service delivery. A service provider which isn’t challenged to make improvements may very often be satisfied with only average achievements. In such a situation, it’s important to review the relationship regularly (at least once a year).

The Three Options When a Contract Ends – Extend, Divide, or Terminate

1. Re-let the contract to the current service provider

If criteria such as end-user satisfaction and service level agreements are being met, the current agreement with the service provider may be extended, with any necessary amendments being included in the new contract to ensure that it will be fit for purpose going forward. After the terms have been renegotiated and a new contract drawn up, the changes required to help deliver optimum results can then be implemented.

2. Division of the contract

The decision could also be taken to transfer part of the responsibilities to one or more alternative service providers. This could happen because the current service provider has failed to deliver particular services to the clients’ satisfaction, or alternatively the provider could have decided to remove certain services from its portfolio. Conversely, client requirements may have changed to such an extent that a service provider with a different area of expertise is now required. In the event of a contract being divided, it is quite possible that the client may bring elements of the outsourced services back in-house.

3. Terminate the contract

There are instances where one or both parties will decide to end the relationship and contracts are terminated. In such a situation, an ‘exit’ takes place which ensures that services are transferred to the new service provider or back to the organisation itself. A complete exit strategy should be developed and the associated transition should be guided by experienced staff or an advisor.

Ideally, a suitable re-let strategy should be put in place at least nine months prior to the contract ending. To learn more about the different approaches, read the full article. This article was ranked number nine in the top 10 most read EquaTerra articles in 2010.

Filed under: Contract Review & Negotiation, How to..., Outsourcing by EquaTerra