Avoiding the outsourcing tender traps

Think carefully when renewing contracts, says Stewart James

Many outsourcing contracts are heading for expiry. If you are re-tendering, some timely lessons can be derived from early movers.

There is a significant difference in the nature of the services supplied under an ICT contract to those of, for example, a facilities management contract. The most significant is the complexity of the subject matter and the effect this has on the transfer of services between suppliers. Consequently, the biggest issue for an ICT re-tendering exercise is the availability of time or, more frequently, the lack of it.

Exit management

It is common to discover that the original managed service agreement makes limited provision for exit management. The lack of such a plan is not insurmountable, provided the parties are willing to work towards a smooth transition. However, where contracts do make provision for exit management, this activity is frequently limited to a time period of three-to-six months before expiry.

Since even modest ICT solutions will require a period of at least six months to make a controlled transfer, the customer will have a number of preliminary problems to resolve.

Whether a re-tendering exercise is in the public or the private sector, it will take a reasonable period of time to select a replacement supplier and agree the terms of a new contract. Public sector regulations can add months onto the process. Although private-sector customers have the freedom to set their own procedure it will still require a reasonable period of time to select a replacement supplier.

Consequently, it would be prudent for any customer to commence re-tendering at least 18 to 24 months before the expiry of a contract. An immovable expiry date creates a hard stop to the re-tendering exercise. Bidders may seek to use this as part of a negotiating strategy, making it important for customers to retain control over the bid process.

The transfer of an outsourced ICT service will require the legacy supplier to provide its replacement with a wealth of detail on the operation and management of the services. Much of this information is also required for a bidder to prepare its pitch.

A good exit plan will ensure that the legacy supplier provides all of the information that is reasonably necessary for bidders to understand the service requirements as part of the related due-diligence process. In the absence of a plan, the customer will need to manage the re-tendering exercise carefully to ensure that it achieves the same output.

This highlights another timing issue: the re-tendering exercise may start a year or more before the exit plan obliges the legacy supplier to provide this information to the customer. Except in cases of termination it is likely that the legacy supplier will be invited, or eligible, to bid for the replacement contract. This can be used to ensure that relevant service information is provided in time to support the re-tendering exercise.

Positive neutrality

The timely supply of bid information is important to both public and private-sector customers. There is a general procurement obligation in the public sector to treat all bidders equally. Without access to this information it would not be possible to create positive neutrality; the incumbent would always have the advantage of greater knowledge about the customer's needs and requirements. It is equally important for a private-sector customer to create equality between its bidders and the present incumbent if the customer is to receive realistic price estimates from the competing bidders.

Additionally, potential suppliers are measuring the cost of bidding against the likelihood of success in deciding whether or not to bid. Ensuring access to information on the legacy services will provide assurance to all bidders.

Dealing with the inequality in cost of a service transfer is another positive step towards levelling the playing field. Both public and private-sector customers should consider the effect that service transformation might play as part of the re-tender.

Service transformation does, however, bring its own timing issues and the customer will need to ensure that a replacement supplier has mastered the legacy services before allowing it to alter the service or its infrastructure. Part of this will be satisfied by assurance testing during the transfer process but it may also be necessary to insist on a phased approach to moving from the legacy to transformed service.

A recessionary period is an opportunity for customers to reduce service costs by creating the right competitive marketplace for them. This can be done only by planning the timing and the process for the re-tender exercise.

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