A quarter of IT leaders across Europe are dissatisfied with one or more of their IT outsourcing (ITO) contracts, and 99% would like to renegotiate or retender one of their ITO deals.
These surprising statistics have been revealed in a new report from sourcing advisor Alsbridge Europe, which surveyed 250 enterprises in the UK, Holland, Switzerland, and the Nordics. The results highlight that relationships between organisations and their IT outsourcing providers are in a fragile state and should serve as a warning to those entering new agreements in the near future, according to Alsbridge’s managing partner Rick Simmonds.
Simmonds explained that lengthy deals done during the height of the economic crisis are proving to be troublesome for companies, having signed for commodity services to cut out costs, but which are now not proving to be competitive enough in an environment of rapid technological change.
“I’m not surprised, there’s a level of dissatisfaction with quite a lot of outsourcing arrangements. I don’t think that there’s a fundamental failing in outsourcing theoretically, I just think a lot of companies have got themselves into arrangements that turned out not to work very well after a few years,” he said.
“There were quite a number of deals were carried out during the credit crunch for really aggressive cost reduction reasons.”
He added: “Unsurprisingly a few years later companies are beginning to realise that they are not fit for purpose, they are not flexing properly, and that the cost savings that were provided up front are starting to bite as providers start to recover their investments. The deals were done pretty fast for the wrong reasons.”
The report found that amongst those wanting to change their ITO deals, some 54% said it was because of changing technological needs, while 44% believe that they are not seeing enough innovation from their supplier. With the rise of virtualisation, cloud and mobile in recent years, there is an increasing possibility that companies are missing out on new technology that could benefit their bottom line and increase productivity.
Simmonds advises companies entering into new agreements to push for the shorter contract lengths, as contracts reaching ten years leave little room for customers to apply pressure to suppliers which know that their customer is tied into the contract for a significant amount of time.
“It’s about building flexibility into the contract, I think that with very long term contracts you increase the likelihood of the technology radically changing around you and you being stuck in an old fashioned environment. Generally speaking contract should be on the shorter side – so three to five years, rather than seven to 10 years,” he said.
“Then you have more leverage and opportunity with your incumbent supplier to adjust it on a regular basis. What we have often found is that clients that are the most frustrated are the ones in the longer relationships.”
IT leaders are wary of the renegotiation process however, with 68% having renegotiated or retendered an ITO contract in the past and many reporting bad experiences.
Some 61% of IT heads have encountered difficulty in renegotiating with an existing supplier and, worryingly, 47% report outright conflict. Four in 10 renegotiation is usually a fractious process.
With 41% reporting difficulty in untangling their contractual terms and conditions, 39% of IT leaders also said that their objectives for renegotiation were not met.
Simmonds added: “I think negotiating is pretty tough if you don’t have really good data and good options. If you are five years in to a 10-year contract and you want to renegotiate it - well tough. It’s going to be very hard. However, if you are in a five-year contract and renewal is coming up in a couple of years, you’ve got much more opportunity to put some pressure on them by saying, we will go out to market, we will change to a supplier that’s more in line with what we want.”
A lot of developing a successful outsourcing relationship is down to realistic expectations and thorough preparation prior to entering the deal, according to Simmonds. The report found that 40% of IT professionals left too many key items to be confirmed after having already signed the contract.
“I think more important than cutting costs, is how the costs are cut and whether enough preparation was done and enough time was taken. The most common thing is that not enough time is taken in the contracting process to be really clear about what the services are, what will change, what will happen in different scenarios – and that’s where the disappointment comes,” said Simmonds.
“A classic mistake is not to do due diligence before the contract,” he added.
Due diligence is carried out by the IT supplier to identify exactly what it in the IT estate it is taking over – rather than just what is said by the CIO. However, too often companies are carrying out this audit after having entered into an agreement with a supplier.
“Obviously the supplier will find things there that the CIO hadn’t identified, and this will affect the price of the contract. If you have done due diligence pre-contract, no deal has been done so both parties have equal leverage. If you do it after the contract you always find things go in one direction, because the leverage is gone and you are already tied in.”
The Alsbridge report creates a worrying picture of outsourcing relationships across Europe. However, Simmonds argues that this isn’t because there is something fundamentally wrong with outsourcing itself, it’s just some deals aren’t being carried out correctly and with the right expectations.
He believes that there is still plenty to be gained from a successful outsourcing deal.
“A lot of it is about expectations. What we see a lot of is that clients engage with an outsourcer or a supplier and they think they want a partnership and they want it to be transformative – but actually when they get down to it contractually, they try to drive the price down as much as they can and they end up with a commodity service,” he said.
“The report is a warning against not doing outsourcing properly. You can make it work very well and you can access a lot of skills, experience, and technology from the outsourcing provider. But don’t do naively and without putting the proper effort in.”