Reap the benefits of renegotiating your BPO contracts NOW!

Enterprise buyers are in a perfect storm when renegotiating their business process outsourcing (BPO) agreements. After a few years of pandemic-driven wage inflation, service providers are facing a significant slowdown in revenue growth and the existential threat of GenAI replacing their billable full-time equivalents (FTE). Matured buyers initiate renegotiations years before contracts expire to obtain better deals. In turn, service providers proactively initiate contract extensions to avoid competitive bids. If you’re a buyer whose company is facing economic uncertainty and pressure to cut costs, this is the time to strike.

In the 2000s, many enterprise buyers renegotiated with their service providers six months before their contracts ended. If fewer processes and FTEs were included in these agreements, such last-minute requests may have been feasible. Fast forward to 2024, most knowledge-based processes are outsourced, and BPO service providers are focused on offering foolproof technology. Moreover, internal stakeholders need to be more knowledgeable of such transitions; they cannot go through a year of transition and performance stabilization with a new service provider. That’s why buyers should actively manage their contracts at least two years before expiration.

Timing, technology, and transition period are primary reasons for initiating the renegotiation

Given the significant shift in automation, analytics, and artificial intelligence, Global 2000 companies are working to adopt new technologies to enhance productivity, profitability, and progressiveness to meet the expectations of all stakeholders, including employees, customers, and investors. This period of uncertainty is affecting many service providers whose entire business was built on FTE-driven agreements. New technological advancements are challenging outdated process designs and the associated manpower requirements. With automation on the horizon, this is the right time for enterprises to capitalize on their negotiation leverage and invest in innovation amid tightened IT budgets. They can push service providers to offer advisory services, process performance improvements, and guarantees for FTE reduction.

According to the HFS Research pulse data, more than 250 business process procurement leaders from Forbes Global 2000 companies (see Exhibit 1) said that the most critical internal challenge is investing in innovation on a tight budget.

Exhibit 1: Top three internal challenges of enterprises

Sample size: 257
Source: HFS Pulse Survey, April 2024

According to the HFS Research pulse data, 75% of enterprises will renegotiate their business services contracts in 2024 (see Exhibit 2). This indicates that enterprises are exploring options to adjust their budget per project criticality, reduce costs, and streamline manual business operations to advance automation processes and align them with market dynamics and competitiveness.

Exhibit 2: Is your firm planning to renegotiate contracts with the following types of providers in 2024?

Sample size: 257
Source: HFS Pulse Survey, April 2024

Providers are keen to engage in technology-driven contract renegotiations

A GBS leader at a European automotive company told HFS Research that they’re in the process of renegotiating their BPO contract with the current service provider. The renegotiation was prompted by changes in the business model and the opportunity to leverage technological advances in automation. Additionally, several strategic decisions were made during the renegotiation, including reductions in headcount and discretionary and marketing expenditures.

Service providers understand that the days of FTE-driven agreements with 2%- 5% contractually guaranteed headcount reductions are numbered. They are actively providing a variety of technologies that help their clients quickly take advantage of GenAI. As per the HFS pulse survey, about 76% of 132 enterprise leaders confirmed that GenAI would impact their business in the next 12 to 18 months.

Exhibit 3: What overall impact do you expect GenAI will have on your business over the next 12 to 18 months?

Sample size: 132
Source: HFS Pulse Survey, April 2024

Enterprise’s essential elements for forward-looking contract renegotiation

BPO service providers must undergo contract renegotiations within the next 12 to 18 months. Considering the current macroeconomic challenges, businesses aim to achieve the best value by aligning with key performance indicators such as cost savings, supplier consolidation, order cycle time, contract compliance, and innovative delivery. In addition to scope, service providers must be prepared to negotiate the commercial model. Also, the declining time and material (T&M) pricing-based model gives way to outcome-based and gainsharing models.

To assist in the early renegotiation phase, HFS Research proposes the following:

1. Love your incumbent, but date the competitors: Take the opportunity to solicit competitive solution-based proposals from other service providers. Include your incumbent in these efforts but explore your options. You don’t know what you miss out on until you engage with other providers.
2. Emphasize the potential of GenAI: To accelerate your firm’s technology innovation, ask your incumbent and prospective service provider to bring their best assets to the table. Avoid technology lock-in by leveraging commercially available assets and securing intellectual property rights. Don’t forget to negotiate transition services if you shift to another provider.
3. Highlight challenges in people-driven processes: For instance, a leader in the global pharmaceutical company’s Global Business Services (GBS) mentioned that they were encountering substantial productivity challenges due to remote working, high attrition, and limited knowledge transfer. These challenges have emerged as key focal points for negotiating with the BPO provider during renewal.
4. Focus on OneOffice transformation: Don’t be content with simple process automation. Reengineer processes using new technologies to ensure outcomes that deliver faster, higher-quality results.
5. De-emphasize FTE pricing: Focus on performance-based pricing metrics and reward your service provider for their advisory and technology efforts. Provide incentives based on outcomes with results-driven awards or termination options. Remove FTE floors from contracts to prepare for unforeseen transformations in the future.
6. Have your term short: In today’s fast-paced technology landscape, opting for a 3–5 year contract with early exit clauses is more practical than locking into a 5–7 year agreement. This approach provides the flexibility to make changes if needed.

The Bottom Line: Given the economic slowdown and budget constraints, businesses seek to maximize their current BPO contracts through renegotiation. To achieve favorable results, enterprises need to cut discretionary spending, automate processes with new technologies, and choose the right service provider.

Approaching BPO contract renegotiation involves evaluating current service efficacy, aligning with strategic business goals, managing costs, and leveraging market data to ensure competitive services and pricing. Effective renegotiation can enhance operational efficiencies and forge a stronger vendor-client relationship, leading to mutual long-term success.