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Outsourcing: prepare to renegotiate your deal, says Gartner

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Nearly 80 per cent of all outsourcing relationships will be renegotiated, according to a new survey by Gartner. Lack of flexibility is the main issue leading to renegotiations, followed by a need to improve the relationship between the supplier and customer.

The research firm found that 15 per cent of all contracts had been renegotiated within what it calls the “honeymoon period” – the first 12 months of the contract – leaving little hope for the long-term success of the relationship.

The survey of almost 200 executives from midsize and large companies in Western Europe also found that 55 per cent of all enterprises with existing IT infrastructure outsourcing arrangements have renegotiated the terms of the relationship within the lifetime of the contract.

Only 23 per cent of survey respondents did not expect to enter into renegotiations, meaning that nearly eight in every 10 outsourcing relationships will go through renegotiations at some stage.

Only six per cent were planning renegotiations to rescue existing deals, confirming Gartner's view that relatively few companies are actively looking to bring outsourcing back in house.

Problems leading to renegotiation

Lack of flexibility was the biggest issue for 50 per cent of respondents, closely followed by the need to improve the supplier/customer relationship and to reduce costs. Forty per cent of service recipients believed they were paying too much for their outsourced capabilities.

"Over the past four years companies have entered into outsourcing agreements based on cost savings and short-term return on investment, with little thought given to their sourcing strategy," said Gianluca Tramacere, senior analyst, sourcing at Gartner.

"The majority of enterprises established long-term sourcing relationships, based on current short-term cost-cutting imperatives. These agreements usually lacked the flexibility to accommodate the dynamic nature of the business environment and we have warned enterprises that this inflexibility would end up costing businesses more in the long term," she added.

According to Claudio Da Rold, VP for sourcing at Gartner, renegotiations should “become part of a proactive cyclical process used to maintain alignment of expectations, reach the right balance between service delivery and pricing and focus on end users satisfaction".

This is particularly so because as outsourcing has become more established, enterprises have gained experience and a better understanding of their business requirements. Consequently, they are now more mature and feeling more confident in their own ability to select and manage the most appropriate vendor for each of their IT requirements.

"Recognising the importance of flexibility, some of the more mature enterprises are now proactively incorporating a mid-term review as part of their contract," said Da Rold. "This should be standard practice. While it is somewhat disappointing that only 16 per cent of survey respondents have currently taken this step, it is nevertheless encouraging and we expect that in the future this number will be much higher."

Gartner believes that the evolving approach to selective 'best of breed' outsourcing is making and will continue to make life more difficult for service providers. They will need to be ready for an ever-evolving environment where they will be expected to support the transition of specific service management competencies to a new provider, warns the research firm.

"Service providers must understand that renegotiation will become an integral part of relationship management," added Da Rold.

Due to the increasing level of maturity within the outsourcing market, Gartner advises companies to place greater emphasis on managing their relationship with the service provider.

Forty-five per cent of survey respondents said that communication with the service provider was the most important area in which they would like to see improvements. Governance — specifically clarification in terms of roles and responsibilities — was highlighted by 29 per cent.

Gartner also warns that as internal IT departments become responsible for acting as a broker of services between business units and service providers, more emphasis should be put on correctly acquiring the right mix of internal skills.

The research firm put forward some advice for service providers:

  • Business and Market Dynamics: Ensure that propositions are compelling: either low cost or high value. Don't get trapped in the zone between being a niche and a one-shop-stop service provider. Expect prices to fall, ability to continually reduce cost will be paramount. Automation and the right onshore/offshore balance will be key. Expect new competition.
  • Relationship Management: Expect demands for increasing openness and transparency.
  • Culture: Develop world-class co-operation skills. Make relationship management a differentiator.

And some advice for service recipients:

  • Plans: Regularly review your sourcing strategy. Keep exit management plans and inter-vendor transition provisions up to date.
  • People: Plan to spend at least four per cent of your IT budget on the right internal team.
  • Controls: Establish clear and strong sourcing governance – know who is in control. Access existing contract structures and measurement systems – ensure contract flexibility and alignment to business needs.

Copyright © 2005, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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