Experts urge users to plan exits

CGNU's termination of a £124m outsourcing contract with IBM has underlined the need for users to look hard at "exit clauses" when...

CGNU's termination of a £124m outsourcing contract with IBM has underlined the need for users to look hard at "exit clauses" when negotiating deals, industry experts warned this week.

Nick Huber

The insurance giant refused to comment on whether it had paid any penalty to IBM for ditching the seven-year agreement after two years. The rise of "mega" outsourcing deals means that when companies break outsourcing agreements because of mergers or restructuring the stakes are higher.

Agreeing a speedy plan to bring IT services back in-house after a deal to outsource to a supplier ends is vital in order to minimise costs and disruption to the business.

However, many companies do not agree a detailed exit strategy with their outsourcing supplier, according to experts. As a result they may have to pay millions of pounds in avoidable compensation.

"Companies take their eye off the ball and are vulnerable to spending excessive amounts of money when they exit a contract," said Robert Morgan, chief executive of outsourcing consultancy Morgan Chambers.

Another major hidden cost of outsourcing agreements comes when the supplier charges the user for loss of profits over the terminated contract, Morgan added.

This is when a supplier demands compensation for the user under the deal.

The projected profits can run into millions of pounds but companies can minimise these payments through thorough legal vetting before signing an outsourcing contract.

Companies considering outsourcing should also have detailed transition arrangements for bringing IT services back in-house, industry experts added.

For more complex outsourcing deals, companies will have to keep their IT systems up and running on a "hot site" while they re-install the systems over a weekend.

However, outsourcing suppliers can charge hundreds of thousands of pounds for mirroring the user's IT systems in a site in this way, Morgan said.

Transition arrangements should also be reviewed regularly as the demands of a business change through mergers or restructuring.

[email protected]

Read more on IT outsourcing