The chancellor's downward revision of the 2008-09 UK
growth forecast to1.75%-2.25% in his 12 March Budgetconfirmed widespread corporate feeling that the UK economy
is slowing, writes Geraldine Fox of Compass Management
Computing. Anticipating a downturn in sales and profits,
companies are already entering intoearly renegotiation of contractswith
their service providers to cut costs.
The temptation to sign long-term contacts is great, especially
when some outsourcers sweeten the deal with
deep discounts of up to 25% for 10-year renewals. But all the
evidence is that shorter contracts are more successful in terms of
both financial and customer service outcomes. Toward the latter
stages, longer-term contracts can not only become misaligned with
business imperatives, they can also become misaligned with
prevailing market price by as much as 40%.
So what can a business do to protect itself against the risks of
mortgaging the future for more immediate financial gain?
Benchmarking
The main tool in any outsourcing client's protective armoury is
a solid
benchmarking clause that allows the business to compare its
pricing at regular intervals with the prevailing market price for a
comparable bundle of services. These clauses are often
restrictive.
For example, the definition of pricing to market is typically
restricted to the client's own industry and geographic markets
using existing technology. But outsourcing should not limit a
business's strategic freedom and clients should ensure they can
benefit from emerging technologies and take advantage of the
globalisation of outsourcing.
Take
offshoring. Five years ago, few outsourcers were managing
European clients' infrastructure offshore while today it is common.
Outsourcers moving operations offshore to lower their costs usually
share only a small part of the savings with the client, keeping the
lion's share themselves, often to make unprofitable deals
profitable.
Western companies, lured by lower staffing costs, have
aggressively pursued offshore application development through
outsourcing, but
productivity offshore can be lower, so simply buying cheaper
bodies will not result in long-term cost savings particularly as
the productivity problem is exacerbated by exploding salaries in
many offshore locations.
Businesses with an eye on sustainable cost and quality
improvements in application development are managing their
outsourcers through
function points, the only effective way of ensuring value for
money.
Future flexibility
Last, but probably most importantly, is to consider how the
business and the economy will change during the contract term. This
takes into account both changing volume requirements as a result of
economic upswings/downturns, mergers, acquisitions and divestitures
and the nature of the support that the business requires from
IT.
Strategies include:
- negotiating the lowest minimum volumes and spend reasonably
possible (infinite flexibility is rarely possible)
- retaining the right to go to competitive tender or bring in an
independent third-party arbitrator to set pricing if there are
large changes in business volumes
- better still, ensuring you have the contractual right to
renegotiate the entire contract if business demand notably grows or
shrinks.
In return, commit to enabling the service supplier to take
advantage of its own economies of scale by removing any
impediments. Jointly invest in consolidation and standardisation
initiatives and share the benefits.
To encourage your supplier to be innovative and support new
initiatives, structure gain-sharing programmes in which the
supplier receives a reward for implementing initiatives that
contribute to business success, or improving services that
contribute to business growth.
Successful outsourcing deals do not concentrate solely on
short-term cost reductions, but also consider the risk factors in
an uncertain future, and clients have the information and insight
to make the right decisions to meet changing conditions.
Geraldine Fox is global sourcing head atCompass Management
Consulting
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