Negotiation process critical to avoiding long-term financial drain from price inflation, TPI reports; analyst offers guidelines for buyers
Houston August 7, 2006 Many buyers of outsourced services are approaching the contract negotiation process without a full understanding of the issues that negatively impact their bottom lines, according to a new whitepaper by TPI, Inc., an outsourcing advisory firm.
As a result, companies that fail to implement appropriate price-inflation mechanisms in outsourcing contract negotiations risk losing millions of dollars during the lifetime of a typical five- to seven-year contract, TPI reported recently in the whitepaper "Avoiding the High Costs of Cost-of-living Adjustments in Outsourcing Contracts: A Litmus Test of Sourcing Done Right."
"Buyers of outsourcing services are often paying more than is necessary because they are not properly negotiating the impact of economic factors, such as inflation, that have a tremendous financial impact," said Chris Kalnik, TPI chief knowledge officer and author of the whitepaper. "It is critical that corporate buyers seeking to maintain a competitive cost advantage understand how future pricing factors will impact the duration of their outsourcing arrangements."
Tips for Buyers
The new TPI study recommends that buyers approach outsourcing contracts from a long-term perspective, using three important guidelines to help avoid financial drain:
Secondly, selection of the appropriate indices on which to base price inflation and/or price deflation formulas is a critical factor in determining an appropriate cost adjustment clause. Utilizing government indices, in particular, has proven successful in the United States and major European and Asian countries. Government-provided indices are typically published more regularly than private company-compiled indices, for which future availability and consistency may be less certain, according to the analyst firm.
Finally, according to the TPI paper, a flexible process is imperative. The potential for success may be enhanced by determining what costs would be without inflation and then negotiating a retrospective adjustment formula based on actual inflation or deflation. This approach provides a consistent measure that is generally acceptable to both the service provider and the client.
The whitepaper is available as a pdf at http://www.tpi.net/pdf/COLA_FINAL.pdf.
Additional Articles of Interest
What's next after Lean? Author Patricia Moody believes that companies facing the "big squeeze" must look to their procurement organization for the next level of savings. Read more in The Analyst Corner column in the June/July 2006 issue of Supply & Demand Chain Executive.
It's best-of-breed versus supply chain suite versus ERP in supply chain solutions: How will your company decide? Read more in "The Great IT Debate," in the June/July 2006 issue of Supply & Demand Chain Executive.
Houston August 7, 2006 Many buyers of outsourced services are approaching the contract negotiation process without a full understanding of the issues that negatively impact their bottom lines, according to a new whitepaper by TPI, Inc., an outsourcing advisory firm.
As a result, companies that fail to implement appropriate price-inflation mechanisms in outsourcing contract negotiations risk losing millions of dollars during the lifetime of a typical five- to seven-year contract, TPI reported recently in the whitepaper "Avoiding the High Costs of Cost-of-living Adjustments in Outsourcing Contracts: A Litmus Test of Sourcing Done Right."
"Buyers of outsourcing services are often paying more than is necessary because they are not properly negotiating the impact of economic factors, such as inflation, that have a tremendous financial impact," said Chris Kalnik, TPI chief knowledge officer and author of the whitepaper. "It is critical that corporate buyers seeking to maintain a competitive cost advantage understand how future pricing factors will impact the duration of their outsourcing arrangements."
Tips for Buyers
The new TPI study recommends that buyers approach outsourcing contracts from a long-term perspective, using three important guidelines to help avoid financial drain:
- Determine the appropriate portion of the outsourcing "market basket" subject to inflation/deflation;
- Select the appropriate index;
- Build a conservative, flexible approach into the contract.
Secondly, selection of the appropriate indices on which to base price inflation and/or price deflation formulas is a critical factor in determining an appropriate cost adjustment clause. Utilizing government indices, in particular, has proven successful in the United States and major European and Asian countries. Government-provided indices are typically published more regularly than private company-compiled indices, for which future availability and consistency may be less certain, according to the analyst firm.
Finally, according to the TPI paper, a flexible process is imperative. The potential for success may be enhanced by determining what costs would be without inflation and then negotiating a retrospective adjustment formula based on actual inflation or deflation. This approach provides a consistent measure that is generally acceptable to both the service provider and the client.
The whitepaper is available as a pdf at http://www.tpi.net/pdf/COLA_FINAL.pdf.
Additional Articles of Interest
What's next after Lean? Author Patricia Moody believes that companies facing the "big squeeze" must look to their procurement organization for the next level of savings. Read more in The Analyst Corner column in the June/July 2006 issue of Supply & Demand Chain Executive.
It's best-of-breed versus supply chain suite versus ERP in supply chain solutions: How will your company decide? Read more in "The Great IT Debate," in the June/July 2006 issue of Supply & Demand Chain Executive.
- More research from TPI.
