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The Way Business Is Moving

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Issue Date: June 2005

Prepare to renegotiate

June 2005

A Gartner survey of almost 200 executives from mid-size and large companies in Western Europe reveals that pressure from clients is increasingly forcing 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. 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 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 term 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 6% 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
50% 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. 40% 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, 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.
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, VP 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 16% 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," added Da Rold. 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. 45% 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 advice to service providers
* Business and market dynamics: Ensure that propositions are compelling: either low cost or high value. Do not get trapped in the zone between being a niche and a one-shop-stop service provider. Expect prices to fall, ability to continually reduce cost will be paramount. Automation and the right onshore/offshore balance will be key. Expect new competition.
* Relationship management: Expect demands for increasing openness and transparency.
* Culture: Develop world-class co-operation skills. Make relationship management a differentiator.
Gartner advice to service recipients
* Plans: Regularly review your sourcing strategy. Keep exit management plans and inter-vendor transition provisions up to date.
* People: Plan to spend at least 4% of your IT budget on the right internal team.
* Controls: Establish clear and strong sourcing governance - know who is in control. Access existing contract structures and measurement systems - ensure contract flexibility and alignment to business needs.
For more information contact Gillian Dolby, Gartner Africa, 021 790 3526, gilian.dolby@gartner.co.za


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