New Contracting Strategies for a New World?

We have been sending client advisories to a number of our clients and a large group of Chief Procurement/Supply Chain Officers are getting together on April 4^th for a discussion on this topic so I thought I would take one aspect of it for this post – namely, contracting strategy.  Let me lay out the issue first.  There is talk amongst the new administration that a change in tax policy will be introduced to make offshoring much more expensive – whether that is manufacturing or services.  This is in addition to the changes in visas like H-1B which will have a similar dramatic impact, especially on your services buy.  Again, regardless of your political view of that, you should be determining how to create a competitive advantage for your company and as is typical, the early movers will walk away with the most advantage.

According to a recent article in Economic Times, some are anticipating a tax impact of 20% on offshoring transactions in the service sector.  That should immediately send alarm bells ringing and have a major impact on your contracting strategy.  Prices you are negotiating today will not hold if that happens and therefore you need to build that flexibility in and perhaps even agree to the actual mechanism to determine  a new pricing model to manage your risk.  You may want to look at your exit clause and make sure that the triggers are much more relaxed, the penalties associated with the exit clauses are reduced or eliminated and if they don’t look strong, ensure that you insert exit clauses now – even in existing contracts.  While long term deals may have benefited the supplier, and meant a better deal and certainty for you as the buyer, that may no longer be a viable option.  Therefore, you may want to start looking at shorter terms in your contracts.

Additionally, you also need to be looking at the additional risk of contract fulfillment by your suppliers, especially in services like IT and engineering which are highly dependent on H-1B visa availability.  All the suppliers in these sectors are very concerned and are wanting protection around deliverables and time frames.

What this will also require is a change in our approach with internal stakeholders.  The typical response to these types of stimuli is a frozen or significantly slower decision process – which does not bode well if you want to be an early mover to capture the most leverage.  Therefore, an aggressive education effort by you will go a long way in helping your stakeholders deal with the uncertainty and unfreeze them to make decisions.  You should also be helping them reevaluate the business and decision model that led to the outsourcing decision in the first place.  If it was primarily based on labor arbitrage and if that is disappearing and much more risk has been added since the decision was made, then it may be time to revisit the assumptions.  Your stakeholders will thank you for it.  It will also  lead to discussions around Strategic Work Force Planning for critical resources with the help of your HR partner because you cannot depend on your suppliers to provide those resources any more – and your HR partner will thank you for it.

By the way, many of the issues raised above also apply to any offshoring you have with your own “captives” as they will be similarly impacted by both the tax and visa policy changes.  These are clearly uncertain times and those of us who take that uncertainly and convert it into risk and then help our stakeholders manage and mitigate those risks will be rewarded with much more strategic roles and recognition – it’s up to each of us to take advantage of these opportune times.  After all, they don’t come along very often  🙂 .