Renegotiating IT Outsourcing Contracts Common

A Gartner survey of almost 200 executives from midsize and large companies in Western Europe released yesterday revealed that pressure from clients is increasingly forcing outsourcing vendors into more flexible outsourcing relationships.

It found that 55% of all enterprises with existing IT infrastructure outsourcing arrangements have renegotiated the terms of the relationship within the lifetime of the contract.

The Gartner survey also disclosed that 15% 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 23% 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 six percent 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.

Most Common Issues

Half 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. Only 40% of service recipients believed they were paying too much for their outsourced capabilities.

“The majority of companies are renegotiating to address the consequences of tactically focused deals,” said Claudio Da Rold, vice president for Sourcing at Gartner. “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.

“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.”

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.

“Recognizing 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.”

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.

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.

Almost half 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 29%. 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.

Gartner advises service recipients to:

  • Regularly review your sourcing strategy. Keep exit management plans and inter-vendor transition provisions up to date.
  • Plan to spend at least four percent of your IT budget on the right internal team.
  • Establish clear and strong sourcing governance — know who is in control. Access existing contract structures and measurement systems to ensure contract flexibility and alignment to business needs.
  • Survey Methodology

    The survey results from a series briefings with executives from medium sized and large companies in France, Germany, Italy, the Netherlands and the United Kingdom.