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Brace yourselves, IT suppliers: You'll be squeezed HARDER next year

It's no fun being an outsourcer

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IT law specialist Clare Murray of Pinsent Masons, the law firm behind Out-Law.com, said that cost-cutting requirements and the changing needs of organisations are behind a rise in the number of IT outsourcing contract renegotiations. She said she expects the trend to continue.

"Customers are under pressure to cut costs and are looking to their suppliers to help them achieve this," Murray said. "The way that the Cabinet Office has conducted negotiations with suppliers is a high profile example of this."

"Customers are therefore seeking to renegotiate the terms of their contract. They are setting the challenge to suppliers, what can you give us? Suppliers are under pressure to preserve the relationship and their revenue stream," she said. "They need to demonstrate what they can do to support their customer and why their customer is not better off exploring cheaper alternatives."

"Suppliers are offering to reduce their prices or to introduce new technology or efficiencies to deliver more for less. In return customers are often willing to vary the scope of the services and/or extend the term of the contract." Murray added.

Murray was commenting after a sourcing advisory company, ISG, said that 44 per cent of all outsourcing contracts agreed on in the first three months of 2012 were renegotiated contracts, according to a report by Computer Weekly.

Steve Tuppen, director at ISG, said that 15 per cent of the total number of IT outsourcing contracts in the first half of this year were restructured contracts worth at least €20m, according to the report.

"Where there have been supplier performance issues this can provide leverage for customers in renegotiations," said Murray. "However, supplier performance issues in themselves can also trigger renegotiations to contracts."

"Both customers and suppliers want to avoid expensive competitive procurement processes," she said. "As contracts come to an end customers are renewing their existing arrangements with their suppliers and renegotiating the terms to take account of their future requirements, such as moving the delivery of services to the cloud. Customers are saying to their suppliers, 'we have cut out the cost of retendering for this work, so we want to see the benefit of that in your offering."

"In cases where customers are moving to single-sourcing to multi-sourcing models, renegotiations with suppliers tend to centre on three things: how suppliers can assist in restructuring the services ahead of the re-procurement of those services; how suppliers can assist in facilitating the phased transition to a multi-sourcing model; and in how suppliers can help in working with new suppliers as they are brought in," Murray said.

Copyright © 2012, Out-Law.com

Out-Law.com is part of international law firm Pinsent Masons.

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