IT directors are moving away from strict service level agreements to negotiating flexible contracts with outsourcing suppliers to get the best value from them.
This was the main message to come out of the OutsourceWorld conference in London last week. By not setting strict targets, outsourcing suppliers can add value rather than just meet service levels.
Steven Hand, group IT director at Lloyds Register, said he completely rewrote a contract the company had signed with an outsourcer in 1999 as it was failing to add value to the business. He said, "In a single monolithic agreement, the supplier does as little as possible for more money."
Instead, Hand renegotiated the contract and switched to a multi-source approach. "We set up a number of agreements with competition between suppliers and gave them the flexibility to innovate," he told delegates.
Successful outsourcing contracts require a partnership between the supplier and the business, according to Richard Sykes, an associate at analyst Bloor Research. "If you have a strong partnership, you have a mutual interest in building shared benefits."
Such a partnership exists between Skandia and HCL. Tim Mann, head of customer service at IT the financial services provider, signed a £100 million contract with Indian outsourcer HCL 24 months ago. He said, "We now have more capacity to fund business growth." Skandia is expecting to save £21 million in the next five years on its application development due to outsourcing to HCL.
Angel Dobardziev, analyst at Ovum, said, "Businesses are moving from buying outsourcing contracts based on time and material to output." He said service level agreements that penalised suppliers for missing targets were unsuitable for businesses that wanted the outsourcer to bring in expertise and innovation that would transform the business.
Forrester Research analyst Euan Davis said that by 2015, the majority of contracts would be based on the value they add to the business rather than cost savings.