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Relationship Management & Renegotiation

March 22, 2010

The latest edition of TPI’s ‘The Platform’ contains a couple of interesting articles by seasoned deal consultants. One looks at IT vendor management and the other at contract renegotiation.

In recent blogs, I have commented about the growing focus on IT procurement and supply management. TPI confirms my impression that in general, post-award management is tending to be undertaken by groups that are separate from Procurement. Unfortunately, they also observe the fact that such groups are often scattered around the organization with no coordination regarding their precise role and, of course, no central investment to develop skills or provide consistent tools.

Suppliers struggle with this type of fragmentation because it frequently leads to mixed messages. Of course, they  sometimes play off the various groups against each other, but quality suppliers are frustrated by uncoordinated interfaces because it delays implementation, slows down performance and frequently prevents timely change – ultimately resulting in disappointing results for both parties. In her article, Cynthia Batty sets out five useful tips for customer organizations to prevent such disappointment. These are:

  1. Define the terms
  2. Create a clear definition of roles
  3. Cooperate with data
  4. Understand the difference between contracts for services and for products
  5. Share business processes to achieve maximum control

Failure to address issues such as this often leads to pressure for renegotiation and David Howie discusses some points to consider when preparing to renegotiate. He asserts that there will be more than 500 major renegotiations of outsourcing agreements this coming year and that ‘most major outsourcing agreements will be renegotiated during their term’. Again, these comments reflect those by IACCM and within other articles on this blog. In part, such renegotiations are inevitable – market volatility leads to increasing frequency of change in the original terms. However, much of the problem goes to the fact that requirements are often poorly defined. This does not always mean that they are imprecise; indeed, the problem can be the exact opposite. Too much precision at a time of market volatility makes renegotiation almost inevitable.

David’s article also offers some useful points to consider, though I would have liked to see more thought given to the positive incentives for a supplier to renegotiate. If, as the article asserts, suppliers try to ignore requests for renegotiation, it is perhaps because such conversatiosn tend to be driven by negativity. I do not agree that win-win is not achievable – and indeed, if it is not, then why are the parties remaining in contract?

The article also fails to suggest that the inevitability of change in many of today’s contracts should lead the parties increasingly to embed planned renegotiation into their agreements. If indeed it is so hard to come back to the table (despite disappointing results), it would surely make sense to ensure automatic triggers for fundamental review of the terms and goals. Increasingly we observe renegotiation becoming part of the planned relationship, rather than an enforced – and perhaps acrimonious – event.

3 Comments
  1. David Howie permalink

    Tim,

    Good stuff. In particular, you have hit the nail squarely on the head when you point out that the trick here is not to wait until service deterioration or similar problems force both parties to the table, but to recognise the inevitability — indeed, desirability — of a future renegotiation stage right when the initial contract is agreed, and to embed processes and activities into the contract that will enable both sides to prepare and support these discussions. How best to plan for such future renegotiations is the subject of a forthcoming piece I am working on.

    David

    • Thanks David – I look forward to reading your next paper. Let me know if you would like to include any of our data on this topic!

  2. Suresh S permalink

    Supplier’s ignore Renegotiation when they know the tendency of the Buyer and that it will not be to their benefit. Buyer often tend to thrust the negative imapcts on the Supplier. Buyer to give the supplier assurance that the renogotiation is for mutual benefit and will not be one-sided, to bring the Supplier to the negotiation table.

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