Businesses must prepare for IT services firms bearing renegotiation gifts

Renegotiations and renewals inevitably bring better terms but could businesses be missing out on much more by focusing on cost

Renegotiations and renewals inevitably bring better terms, but could businesses be missing out on much more by focusing on cost.

Contract renewals and renegotiations are currently propping up the IT services sector as battle-hardened businesses strive to get more for less out of their existing suppliers. The equally battered and bruised suppliers are usually willing to offer renegotiation if the contract is a few years old, because the investments have already been made on their side and margins are increasing.

According to research from ISG, renegotiations accounted for $0.97bn and new deals $0.94bn in Europe in the first three months of this year.

But technology and delivery models emerge and evolve at a pace and businesses could risk missing out on significant benefits by committing to contracts for what appear large benefits in the current context.

Recently, treasury-backed National Savings and Investments (NS&I) awarded Atos a seven-year IT outsourcing contract, with plans to increase digital services and achieve savings of £400m during the contract period.

The contract was originally awarded in 1999 to Siemens IT Solutions and Services (SISS), which Atos acquired in 2010. It is up for renewal in 2014 and two years ago NS&I began the procurement process to find a supplier to take it forward – Atos beat off competition from capita and HP.

This is typical. A renewal approaches and the customer puts the tender out and after fierce competition sticks with what it has.

But this is not always the case. Another deal that was recently up for renewal, but changed hands, was the contract from the Home Office to run the Disclosure and Barring Service (DBS), which was created when the Criminal Records Bureau and the Independent Safeguarding Authority came together. 

TCS took the deal from Capita. Its strategy to increase the amount of automation and digitisation was a factor in the win and not lower price. The Indian offshore suppliers in particular have watched for contracts coming up for renewal and then targeted them aggressively.

The fact that the public sector by law has to put contracts out to tender makes supplier change more likely than in the private sector.

Renegotiations need not be just about driving a lower cost but could involve reshaping a contract to give IT departments a better view across its IT operation.

Steve Tuppen, director at service integrator Mozaic, said businesses are revisiting outsourcing contracts, and it is not always about getting a lower price.

“When many of the IT outsourcing contracts were signed six years ago, they were large end-to-end agreements," said Tuppen. "Today CIOs want more transparency so they can assess which parts they can do more effectively."

He said many renegotiations today involve disaggregating services: “It is easier to do this with the existing supplier. It could be an extra year if CIOs change suppliers to do this.”

Incumbents are also willing to negotiate early. Tuppen said if an organisation has a clear idea of where its business is going, it can renegotiate, even mid-term, with an existing supplier.

And the current lack of business has put the onus on the suppliers to push for renewal.

Robert Morgan, director at outsourcing consultancy Burnt-Oak Partners, said that suppliers are currently driving the renewals increase.

“Because there is no new business, suppliers are going to customers and saying ‘we want to look to renegotiate'.”

He said when suppliers have relationships with senior executives such as the CIO, they are more likely to get a renewal early. 

“But if the relationship is with a procurement department or if the organisation is in a regulated sector the contract is likely to go out to tender.”

Morgan said that complexity involved with changing supplier largely depends on who the supplier is. 

“If it is a global supplier it is difficult because staff are incentive to retain contracts. Smaller local suppliers are easier to change.”

What the experts say about renegotiating IT outsourcing contracts:

  • “Be prepared to concede certain aspects (increasing the term, adding to the scope, simplifying measurement criteria, etc) in order to secure a more flexible, agile, accountable contract.”
  • "Be very clear on what the reasons for the renegotiation are and what the objectives from it will be; try to do a once and for all re-baselining taking into account all issues, rather than death by a thousand cuts. Think laterally about what changes could be made."
  • "The most important thing for a company considering renegotiations is to have a clear understanding of their objectives, and what they want to get out of the restructured IT outsourcing contract. A successful renegotiation also relies on creating financial leverage, a willingness to execute viable alternatives and a strong commercial relationship with the supplier.  Another significant factor is time. Whether mid-term or end-term, companies must ensure that they allow enough time to analyse and understand all factors, which might impact the new contract and to fully engage their internal stakeholders to ensure the best possible outcome."
  • "It is easy to get caught up in the renegotiations process, but it should be remembered that not everything is negotiable - a company must decide on its priorities and negotiate to build a workable solution and sourcing relationship, not to win a battle."
  • "Build a deeper, more forward-looking, and business-relevant understanding of the points of difference and parity between IT services firms; demand more flexibility and pro-activeness from IT services vendors; direct more attention toward productivity improvements,  not just cost reduction; seek and leverage more aggressively operating and business model innovations; collaborate with IT services vendors to co-create new capabilities in areas that matter; and demand constant improvement and global best practices."

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