Brace yourselves, IT suppliers: You'll be squeezed HARDER next year
It's no fun being an outsourcer
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.
You're better served with effective IT Strategy
With the businesses and the markets changing, if not revenue stream oscillating, a company is better advised not to outsource in first place, and by keeping the IT operations in house. By doing so it has full control over the IT operations and does not need to crosscheck extensively that the service provider is actually doing its job. With an effective IT strategy, ideally based on commodity hardware and software, IT services can be adapted to the changing market situations. Hardware vendors a very good in selling dynamic resource allocations and de-allocations on servers, but they only work for short term, temporary performance oscillations. They fail, however, in long term planning and adaption. I have never come across any IT Architect, or a Senior VP for IT who built in the flexibility of reducing IT operations, even conceptually. This is because program managers and vendors expect growth and nothing else, and the hardware design is practically done by the sales representatives of the hardware vendors.
Funny, tho, the many times I looked into wide eyed execs when I presented the framework to bring chargeable flexibility to IT services. Was it implemented? Of course not, since this idea didn't come from da big wig's mouth and wasn't wrapped between a steak dinner.
Aren't they supposed to do this anyway?
Anonymous because I work for a consulting company.