Almost two-thirds of senior IT executives do not think their suppliers would be open to renegotiating outsourcing contracts, despite the upsurge in activity.
According to a survey of 250 senior IT decision-makers in mature European markets, 65% believe suppliers would not be open to renegotiating and 48% think the suppliers would kick up a fuss if asked to renegotiate.
The survey, carried out by sourcing consultancy Alsbridge, also revealed that businesses are not currently capable of renegotiating effectively, with 71% admitting they lack the necessary information to do so. Just over half (51%) are addressing this by investing more time in renegotiations.
The confluence of these factors has given 39% of the executives the feeling of being locked in to contracts.
Alsbridge managing partner Rick Simmonds said there is currently a lot of renegotiation activity because many multi-year contracts are coming to an end.
He said many of these contracts were signed with the specific aim of reducing costs when the downturn was at its deepest point. “A lot of deals were done in response to the downturn a few years ago, and they were to cut costs. [Decision-makers] have to ask whether they are still fit for purpose,” said Simmonds.
He said both parties need to be open to change.
“IT suppliers are right to kick up a fuss if clients are moving the goalposts and failing to honour previous commitments or recognise unrecovered investment," Simmonds said.
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“However, if the business need or the technology world has changed, then it is incumbent on suppliers to be receptive and not keep their clients in the stranglehold of an outdated contract. This applies even more when the contract is nearing its end of term, when everything should be open for reshaping,” he added.
But businesses need to invest time and resources in the renegotiating process if they are to benefit, as they are not currently prepared. A total of 57% of the executives quizzed said they do not have an overarching sourcing strategy in place, and 42% have no formalised review point in their ITO contracts.
Many have learnt from past mistakes, with 54% building bigger renegotiation teams and 51% investing more time in proceedings. Almost half plan to start the renegotiation process earlier.
“At the heart of every successful contract is a clear renegotiation strategy," said Simmonds. "IT leaders can bolster their position by matching up to suppliers' highly skilled and well experienced teams, and by starting the process at the right time – usually around two years before the contract ends.”
He said multi-sourcing is a way of making renegotiations easier because relationships with multiple suppliers means there are alternatives if required. But businesses doing this need effective service management in place.
According to research from ISG, renegotiated IT outsourcing contracts accounted for $970m and new IT outsourcing deals $940m in Europe in the first three months of this year.
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) 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 that 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 renegotiation 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."