Survey higlights key issues for senior IT professionals in IT outsourcing contracts

Supply Management, the official journal of the Chartered Institute of Purchasing and Supply, yesterday published details of a report by outsourcing consultancy Alsbridge into customer satisfaction with IT outsourcing arrangements.

According to the report, just over a quarter of the 250 senior IT professionals canvassed were unhappy with at least one of their IT outsourcing contracts, with 76% considering renegotiating or retendering two or more of their IT outsourcing contracts before the end of the term.

The reasons for this are telling, if unsurprising.

Too much left to be agreed post signature
40% of respondents said that they had left too many important details in the contract to be confirmed at the point at which the deal was signed.

There is often a push to sign a contract by a certain date, come what may.

However, that can be dangerous. Once a contract has been signed, the balance of power shifts hugely in favour of the supplier, meaning that the customer will usually be in a very weak position when it comes to reaching agreement on the outstanding issues.

If things are left to be agreed, it is therefore essential that the contract sets out a clear process for agreeing those outstanding points (with appropriate remedies if agreement can’t be reached) and that key commercial issues are resolved prior to signature.

Changing requirements
54% of respondents said that their IT outsourcing contracts failed to keep up to date with changing technology needs, with 46% saying that the contract also failed to keep up with changing business needs.

These are classic problems, particularly in long term outsourcing contracts. IT quickly dates, and the requirements of the customer’s business are always changing. It’s therefore essential that the contract includes a process for ensuring continuous improvement obligations. This might include IT refresh obligations, obligations to keep up to date with industry best practice or to adopt industry standards, and an obligation to regularly propose ways in which the services can be improved or delivered at better value.

Combined with this, it’s also important to ensure that the contract contains a robust governance and change control procedure, which allows the customer to ensure that issues are managed and to introduce changes to reflect the changing needs of its business. This might also include clear processes for ramping up or ramping down service provision or the scope of the services in the event of changing business requirements.

Value for money
Another theme coming out of the survey was value for money. 49% of respondents cited diminishing returns on their IT outsourcing investments, whilst 36% highlighted problems with complacent suppliers. A further 46% of respondents said that they were under pressure to cut costs.

Benchmarking provisions can help a customer to keep tracks on whether its outsourcing contracts are delivery value for money. However, a bechmarking regime is only effective if it encourages the supplier to keep its service provision competitive. Key to that is ensuring that the customer has adequate remedies in the event that the benchmarking findings show that the supplier is out of step with the market. This might include mandatory price reductions or ensuring that the customer can break the contract and move to another supplier (albeit the latter is not without cost, given the expense involved in carrying out a new procurement exercise and transition to another vendor).

Long term, not short term
If these issues are properly addressed in the contract then the outsourcing arrangement is likely to be more productive and rewarding for both the customer and the supplier.

Whilst there is always a pressure to sign deals as soon as possible (particularly against articial deadlines such as the end of a calendar year or the supplier’s quarter), this survey just goes to show that spending more time on the contract (and involving legal input at an early stage in the procurement process) can lead to a more satisfactory outsourcing relationship in the long term.

Which, ultimately, is what outsourcing is all about.

Martin Sloan

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