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In this guest post, Procurement Leaders invites Alsbridge managing partner Rick Simmonds to offer his views on recent reports of dissatisfaction with IT outsourcing contracts.
IT leaders face some important questions as their IT outsourcing (ITO) contracts age: Is their supplier still delivering? Are they broadly happy with the relationship? And if not, do they want to renegotiate?
These are important questions today as many existing ITO agreements were hastily organised during the recession, when budget pressures led to knee-jerk reactions focused heavily on short-term cost savings. The business technology landscape is also evolving rapidly, meaning contracts can quickly ‘feel’ out of date to CIOs.
According to Alsbridge’s latest study, Terms of Endearment, as reported last month by Procurement Leaders, many IT heads are now struggling with ITO contracts that don’t deliver. The reasons for this are varied, with clients and suppliers blaming a mixture of poor planning, a lack of decision-making information and expert advice, miscommunication, complacency and inadequate contractual agreements.
Rather than throw the baby out with the bathwater, the majority of IT leaders plan to renegotiate with their incumbent supplier. This approach often makes the most sense, as retendering can be costly and disruptive, not to mention high risk. We’d always encourage a serious attempt to make it work with an existing supplier before going to the market.
But what should an IT leader consider to ensure that the next deal they sign meets everyone’s needs, not just now but for the long haul? Here are our top recommendations:
1. Spend time planning
A well thought out strategy is invaluable. This includes appointing the best team to match the supplier’s larger pool of experienced negotiators, and leaving enough time to gather the necessary information and data.
2. Arm yourself with reliable market data
Benchmarking clauses can be difficult to use, but market data is available to help you see if you’re paying a fair market price for the services and value you want, and determine the size of the prize. Negotiating without data is like going hiking without a map.
3. Think long-term
Short-term objectives can steal the spotlight in contract renegotiation, but what use is a five-year contract that doesn’t meet your business needs in four or five years’ time? Successful renegotiation is about achieving long-term value and facing any previous issues head-on.
4. Create a true partnership
The most cost-effective and successful outsourcing relationships are based on honesty, transparency and respect. Work together with your supplier, and bring in the necessary expert advice, to agree a contract that meets your expectations and gives suppliers room to deliver a proper service.
The next round of ITO contract renegotiations is a significant opportunity for change, and will dictate ITO satisfaction and performance levels for years to come. While the pressure to lower costs remains high, it is vital that IT leaders learn from their experiences and apply best practice in future deals.
Rick Simmonds is managing partner at Alsbridge plc.