Time to renew outsourcing contracts

HR Magazine,  Oct, 2004  

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Many first-generation benefits and HR outsourcing contracts negotiated five to seven years ago will be up for renewal during the next 12 months. "Industry consolidation and changes in service needs make this a great time for companies to negotiate their next outsourcing contracts," says Robert Crow, a senior consultant at Watson Wyatt who advises large companies on their contract renewals. "But lowering costs and improving service quality isn't automatic. Companies must be proactive in their contract renewals to get the most competitive deal," he says.

Original outsourcing contracts were set up without much information on such things as usage levels. Many employers wound up with higher than expected outsourcing costs because locking in long terms in the original contracts prevented them from negotiating lower rates after a few years. Vendors also profited when an employer's population size changed dramatically and the contracts did not include reasonable transition fees.

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Today, employers have several years' worth of data available, and they should take advantage of the opportunity to reduce costs and improve customer service, Crow says. Advances in technology and the growing use of web-based transactions, for example, mean fewer calls to customer service call centers, which can cut staffing requirements and costs. Companies also should solicit input from employees to get a better perspective of actual service quality and cost savings and take this information into account when revising the contract.

Crow suggests that companies consider shorter contracts or contracts that allow for mid-term renegotiation. "We have seen a continued reduction in various service charges over the last six years," he says. "Because we expect this trend to continue, locking in to a long-term contract may not provide the best deal."

COPYRIGHT 2004 Society for Human Resource Management
COPYRIGHT 2004 Gale Group