Vendors must be prepared to renegotiate outsourcing

28 Apr 2005

Pressure from clients is increasingly forcing vendors into more flexible outsourcing relationships and many must be prepared to renegotiate outsourcing contracts, a Gartner survey reveals.

The survey of 200 executives from midsize and large companies in Europe found that 55pc of all enterprises with existing IT infrastructure outsourcing arrangements have renegotiated the terms of the relationship within the lifetime of the contract. Gartner repeated warnings made over the past four years that if organisations continue to engage in outsourcing simply to reduce cost, the number of contracts under renegotiation will continue to increase further in the next two years.

The Gartner survey also disclosed that 15pc of all contracts had been renegotiated within the first 12 months, what Gartner terms the ‘honeymoon period’, leaving little hope in terms of long-terms success for the relationship. Only 23pc of survey respondents did not expect to enter into renegotiations. Gartner pointed out that this means nearly eight in every 10 outsourcing relationships will go through renegotiations at some stage.

Only 6pc were planning renegotiations to rescue existing deals. This confirms Gartner’s view that relatively few companies are actively looking to bring outsourcing back in house.

Some 50pc of survey respondents reported that lack of flexibility remains the biggest issue leading to renegotiations. Improving the supplier/customer relationship was also identified as a key area for improvement, followed by cost reduction. Some 40pc of service recipients believed they were paying too much for their outsourced capabilities.

“Over the past four years companies have entered into outsourcing agreements based on cost savings and short-term return on investment, with little thought given to their sourcing strategy,” said Gianluca Tramacere, senior analyst for sourcing at Gartner.

“The majority of enterprises established long-term sourcing relationships, based on current short-term cost-cutting imperatives. These agreements usually lacked the flexibility to accommodate the dynamic nature of the business environment and we have warned enterprises that this inflexibility would end up costing businesses more in the long term.

“The majority of companies are renegotiating to address the consequences of tactically focused deals. This includes vendor performance, redefinition of service level agreements and/or scope of the deal, redesign of the due diligence and ongoing governance of the relationship as well as achieving further cost reduction,” Tramacere added.

Instead, renegotiations should become part of a proactive cyclical process used to maintain alignment of expectations, reach the right balance between service delivery and pricing and focus on end users satisfaction,” said Claudio da Rold, vice-president for sourcing at Gartner.

Gartner said the good news is that as outsourcing has become more established, enterprises have gained experience and a better understanding of their business requirements. Consequently, they are now more mature and feeling more confident in their own ability to select and manage the most appropriate vendor for each of their IT requirements.

“Recognising the importance of flexibility, some of the more mature enterprises are now proactively incorporating a mid-term review as part of their contract,” said da Rold. “This should be standard practice. While it is somewhat disappointing that only 16pc of survey respondents have currently taken this step, it is nevertheless encouraging and we expect that in the future this number will be much higher.”

Gartner said the evolving approach to selective best-of-breed outsourcing is making and will continue to make life more difficult for service providers. They will need to be ready for an ever-evolving environment where they will be expected to support the transition of specific service management competencies to a new provider. “Service providers must understand that renegotiation will become an integral part of relationship management,” da Rold added.

Due to the increasing level of maturity within the outsourcing market, Gartner advised companies to place greater emphasis on managing their relationship with the service provider.

Some 45pc of the survey respondents said that communication with the service provider was the most important area in which they would like to see improvements. Governance — specifically clarification in terms of roles and responsibilities — was highlighted by 29pc.

Gartner said that as internal IT departments become responsible for acting as a broker of services between business units and service providers, more emphasis should be put on correctly acquiring the right mix of internal skills.

By John Kennedy