IT outsourcing contracts need to be flexible enough to accommodate
change, writes Julia Vowler, otherwise you will need to be another
Houdini to get the best out of your IT spend.
A recently-published Holway Ovum report forecasts that outsourcers
will control the IT market in the next 10 years, but that does not
mean that clients should be tied into unsatisfactory contracts.
Outsourcing has many attractions: it gets IT "off the books", while
users take advantage of outsourcer's economies of scale, access
scarce skills and exploit the outsourcer's best-practice
experience.
Such are the attractions that already about 20% of FTSE companies
have set up major outsourcing contracts and the market is set to be
worth more than £11.5bn by 2004, and account for half of the UK IT
services market.
One of the key benefits for both clients and outsourcers is
flexibility - but this can be a double-edged sword.
Users look to outsourcers to deliver major change in IT
infrastructure and architecture, but change is risky even when
anticipated, and far more so when it cannot be foreseen. Having IT
delivered via an outsourcer does not alter the fact that
flexibility - preparedness for change - costs money.
However, users should ensure that, when the time comes to change,
whatever the outsourcer develops and delivers, they only pay the
true cost of that development and delivery.
Companies need to guard against artificially high costs generated
by over-the-barrel contracts that do not allow for flexibility and
future change. Though neither user nor outsourcer can predict what
changes the future will require, that it will require changes of
some kind is predictable, and must be built into the original
contract.
"The user's option to realign the contract is an essential
requirement of the initial contract," says Robert Morgan, chief
executive of outsourcing consultancy Morgan Chambers. "The key to
success is to understand how to build flexibility without undue
penalty in order to cater for significant change. Understanding
applied here virtually guarantees a successful relationship."
Morgan advocates that all companies outsourcing IT should include a
continuous improvement programme in the contract from the outset,
as a means of future-proofing the user and containing risk.
A continuous improvement programme, says Morgan, "allows the user
company to be assured that the outsourcing contract will adapt to
new business and new technology regimes as and when they are deemed
commercially necessary and advisable".
This warning may seem ironic when all too often it is the
outsourcer that is desperate to change a client's IT.
"Outsourcing deals don't work well when expectations are
different," warns Adrian Quayle of the Gartner Group. Problems can
arise, he says, when the client just wants a utility-style
outsourcing agreement to decrease cost while the outsourcer wants
to initiate a wide-sweeping programme of improving IT effectiveness
- for which the outsourcer will, of course, charge considerably
more.
Outsourcers can present tempting reasons to undertake ambitious
changes such as business transformation programmes which tend to be
put on hold when recession hits.
"Outsourcing is a legitimate and underutilised tool in an uncertain
environment," says Les Mara of analyst Cap Gemini Ernst &
Young, arguing that outsourcing can free sufficient financial
resources to finance such transformation programmes, which the
outsourcer will run for you.
To their credit, increasingly these days outsourcers are prepared
to put their money where their marketing is and enter into shared
risk-and-reward relationships with their users, to convince them of
the benefits of business transformation programmes - though just
how much risk is shared is, again, something the user must hammer
out. The principle has to be, says Mara, "If things go wrong both
parties need to feel it, and if things go right both parties need
to feel it."
An outsourcing relationship can and should be a strategic
partnership - from a legal point of view it is a contract - and
every contract must be finite. Because the business environment is
uncertain, premature termination - if the user merges or demerges,
for example - will cost money. But although the outsourcer should
be compensated for the loss of an anticipated revenue stream, it is
up to the user to ensure that early closure charges are not
punitive.
Whichever way a user cuts the outsourcing cake, one truth is
paramount - change costs money.
Guest editor's comment: flexible contracts
Where
should the balance of flexibility fall in an outsourcing contract?
Here are my golden rules:
- Build a mutually profitable relationship. Customer and supplier
both need to benefit. You have to ensure there's a win-win. If a
supplier does not make a profit he will go under, which will not
benefit you, his customer
- Limit the term of the contract. In buying development skills
from India, for example, I made it a two-year contract, and then
negotiated an extension. In that time-frame costs of skills may
change, as may business and market conditions
- Recognise that any outsourcing contract results in a degree of
risk, both for the customer and the supplier
- Look for ways of minimising your risk. For example, my
outsourcing contract guaranteed a daily rate for an agreed number
of man days over a two-year period. Each item of work within those
two years was subject to a separate negotiation where the supplier
accepted a fixed-price contract within the terms of the overall
contract. Failure to complete the work within that time-frame did
not then result in extra cost to me, the customer
- Negotiate the contract before signing it - and be clear what
you want. Don't take the supplier's standard contract. Work through
all the clauses, such as service level agreements, especially the
exit point and flex points, to allow for events like mergers.
Suppliers may not be keen to do this but I've managed to do this on
two outsourcing contracts despite initial suppler resistance
- Accept that you must invest resources in contract negotiation -
it is essentially a walk-through of the management processes you
will use during the life-time of the contract. If you do not do
this you will find situations arising which had not been thought
through and will be potential conflict areas. Take legal advice
from a specialist lawyer - expensive but very cost-effective
- Accept that you must invest resources in contract management.
For a major contract meet with the supplier monthly. The first
meetings will be crucial to ensure that minor problems do not
escalate to crisis proportions
- Convince business management that change will always cost
money. If you enter into a contract worth millions of pounds change
will be expensive. Would your business expect that flexibility from
other suppliers? It's important to treat IT suppliers as any other
corporate suppliers.
David Rippon is chairman of the IT directors' organisation
Elite