When expectations of the logistics outsourcing have not been met: renegotiating instead of tendering!
In my projects with companies that already have outsourced warehouse logistics, I notice an astonishing phenomenon: after a few years, a certain dissatisfaction with the outsourcing almost always seems to emerge. At the very least, there is a not intangible disappointment that the expectations of the outsourcing project or those towards the service provider are not fulfilled.
Now one could say: this is the typical 5-7 year cycle that we find in many areas of the economic life of companies. I believe, however, that this is a fairly ‘normal’, almost inevitable development. At the beginning of an outsourcing project there is a certain euphoria, followed by teething troubles, followed by the stabilisation of the new structures in both companies involved. Typically, both parties are then happy to have survived the ‘tour de force’ and the frequent interaction with the service provider moves out of focus. Regardless of this, the ‘evolution’ of the outsourced (logistics) business continues: In small steps the general conditions, the logistical structures and quantity structures etc. change. As a consequence, there is a significant deviation from the originally agreed structures, the processes designed and ultimately the agreed remuneration model. Typical consequences: One of the partners is dissatisfied! The client expects that the service provider has to compensate this evolution. The service provider expects the client to understand the changed cost basis and so on… The final reflex of the client is unfortunately often to place a tender on the market at the next opportunity.
From my experience the described constellation is completely ‘natural’. The disappointment and, in some cases, the escalation between the companies is mainly caused by the lack of regulations in the service contracts regarding this kind of ‘evolution’ of the logistics structures. Non-binding quantity projections based on the client’s budget or medium-term plans are of course easy to include in a contract appendix, but in the end they never meet the real changes of the business. And these are naturally not precisely tangible at the time of negotiation! However, previous tenders and service contracts often pretend this transparency of the future. Only rarely is the ‘mechanics’ of dealing with such changes adequately regulated in the contracts, so that the client receives the best possible logistics service at the best possible price in the long term, while at the same time the service provider has a real chance of running a profitable business.
What does this mean? Firstly, we must design better contracts and remuneration models in the future. Secondly, we must be aware that dissatisfaction will occur at some point. And thirdly, that in most cases this dissatisfaction can be resolved through moderated, well-prepared and fair renegotiations! In this way you save the effort of running a tender and eliminate the risk of changing service providers. This will only work, however, if it is professionally carried out – also ambitious, but less effort than launching a tender through which you also send strong signals into the market. Let’s be honest: Finding a new service provider via a tender (supposedly cheaper than the existing partner) is (almost) always possible. Whether or not the realised cooperation then leads to more satisfaction has to be proven.
And for the sake of completeness: If no satisfactory solution can be reached in the renegotiation, the way of a tender is still open!
Sounds like a lot of work? Yes, but it is worth it!
Do you have other experiences? I am happy to receive your feedback.