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Good OM Reading: Options as an Outsourcing Contract Ends

December 5, 2016

We discuss the important topic of outsourcing in detail in Chapter 2. But what happens when an outsourcing contract is nearing its end? The buyer faces a strategic decision: extend the contract in its current form, divide it between the incumbent and more parties, or terminate it. “The decision should not be hastily made, or the solution may be worse than the problem,” writes KPMG in its new report, Extend, Divide or Terminate . Here are the 3 options:

1.Extend and renegotiate the contract with the current service provider: If criteria such as end user satisfaction and service level agreements are being met, the existing agreement with the service provider may be extended. A contract extension can take 2 forms. If the buyer is fully content with the provider’s performance, or if it is looking to buy time, extending the contract under the current terms is a reasonable choice. If amendments are called for to help ensure that the new agreement is fit for purpose going forward, the changes should be renegotiated.

2. Divide the contract: A buyer may also make the decision to transfer part of the responsibilities to one or more alternative service providers. This may be because the current service provider has failed to deliver particular services to the client’s satisfaction, the provider has decided to remove certain services from its portfolio, or the client’s requirements have changed to such an extent that a provider with a different area of specialization is required. When a contract is divided, it is possible that the client will bring elements of the outsourced services back in-house.

3. Terminate the contract: Sometimes one or both parties will decide to end the relationship. In such a situation, the services are transferred to a new service provider or back to the buyer organization itself. To help ensure a smooth transition, a complete exit strategy should be developed and the transition guided by experienced internal staff or an external advisor.

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