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Three options for managing outsourcing relationships

At some point, IT leaders need to take a hard look at existing outsourcing contracts to understand how well they reflect current business practices

Spring of 2020 brought a transformation in IT operations. The massive, rapid shift to working from home was a technical triumph, but some enterprises will find their supplier contracts no longer fit their usage. This article aims to give an insight into the process to address the mismatch.

Third party suppliers in the areas of cloud, software as a service (SaaS), datacentres and public cloud, as well as anything else sold as a service, typically price their services by unit or usage, with tiered pricing schedules according to volume. Their price schedules tend to be up-quick, down-slow – meaning that they tend to respond quickly when usage increases, and slowly, or not all, if it falls.

Currently, enterprises may be either paying for a service level they are not now using, or  may be using services at an increased level without the appropriate volume discounts. The  issue goes unaddressed because day-to-day operational issues take priority, as they should.

Should you renegotiate?

Renegotiating contracts needs a methodical approach, and a certain mind-set which may not come naturally. There can be a fear of haggling and confrontation, and sometimes being “British” we can be almost embarrassed to attempt a renegotiation.

There is also a common misunderstanding that you need to be a very large player to get better contract terms. The aim should be for a fair, balanced contract, and since contracts are always written by suppliers, they do tend to favour suppliers. In reality, vendors expect their customers to challenge them, and will want to assist so that their customers stay with them post-Covid-19.

A successful negotiation can improve the financial position of the organisation you work for. If you can negotiate a better contract with stronger operational terms, it will also make a difference every month going forwards, in terms of supplier performance

Most of us know how to reach a deal on a house or a car, but IT service pricing is hugely complex. Enterprise IT contracts can easily have 10 to 20 pricing factors, and many of those will be inter-related, but there are large rewards for tackling them in the right way. In some cases, there can be immediate cost savings.

Finally, bear in mind that these negotiations are more about cost and operational terms, not legal terms, so there’s no need to engage legal counsel.

Reviewing your target contracts

The best approach is to set aside a few hours to comb through your chosen contracts with a highlighter pen, and indicate each and every pricing term. As well as the obvious prices per service, look at terms such as automatic percentage increases, volume discount tables and minimum revenues.

Suitable contracts may be for SaaS, your managed service provider (MSP), datacentre, any public cloud contracts, mobile phones or network and comms contracts. If the actual use has shifted from the contracted level, there is a perfect and fair trigger to start a negotiation.

Check if pricing is granular enough

A good test here is whether you can match the invoices to what’s in your contract. If not, or if it’s a painful exercise to do so, the pricing needs to be more granular.

This list is the framework for your negotiation plan. The next step is to add where you’d like to get to on each point.

Supplier management requires familiarity with the terrain and tenacity, and if these skills are not available in house, they can be sourced from outside. It is beneficial to draw on market knowledge, to know what is achievable and to have the right precision wording available for areas such as service definitions, fair pricing mechanisms and realistic service-level agreements (SLAs) and service credits.

You may be able to offer some ‘carrots’ such as contract extensions, renewals, additional services, or a chance for publicity rights.

For new contracts, watch for red flags – showstoppers – that must be resolved before you sign. An example of this would be a contract with no mention of an exit clause – this is surprisingly common in IT service contracts.

Suppliers are skilled in revenue protection and the art of writing contracts. Some change their licensing and pricing so frequently it can be hard to keep up. While contracts may pass legal review before signing, in reality only around 50% of the terms are legal, and it’s the other 50% that relate to the service levels and operational outcomes which really matter for smooth running, but are too niche for lawyers.

Naturally, people care most about cost, especially at present, but it’s also possible to improve terms and lay the foundations for a happy and productive supplier relationship, and a stronger commercial position to start the new year.  Do not be afraid to tackle a vendor – they need their customers to stay with them post-Covid-19 and most will try to help.

Top tips on targeting contracts for renegotiation

Choose contracts which are:

  1. Over £100k per annum – the typical savings of ~20% make the exercise worthwhile on cost alone.
  2. Haven’t been looked at for 2 years or more – technology markets move quickly so you may be on old pricing schemes or older services.
  3. Where your usage has changed up or down since you signed.

Source: Turnstone Services

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