Outsourcing 2010: repairing of crisis contracts, part 2

This post is a follow up on this one and it described my thoughts on some of the outsourcing contracts which have been signed in the last 1,5 years. These contracts had to be signed as fast as possible and this meant cutting corners. Cutting by standardizing services which should not be standardized, transferring valuable knowledge, and a contacts structure which fits a shrinking economy, but not a growing one.

As a result will many outsourcing contacts signed in 2008-1009 increase the gap between demand and supply instead of closing it. Contracts solely aimed at reducing price/cost are typically very rigid and do not leave a lot of room for flexibility. Flexibility is however something the business needs now the economy is picking up again. The market dynamics are slowly moving back into the fast paste from before the crisis. This means the business will want to move quickly on new opportunities for growth and does not want to be confronted with outsource contracts which limit its maneuverability.

Add to this that the cost/investments in the contracts signed in 2008-2009 (e.g. transition & transformation cost) still outweigh the benefits (at least for the vendor, maybe the client gets lower prices from day one and pays the transition/ transformation investment as a markup on the price). With the first benefits starting to show only this year plus a potentially  increasingly unhappy business the pressure on renegotiation will increase. Renegotiation in order to create a contract more fit for a economy which is expanding again and requires a contract that is flexible (e.g. service and volume mix) and allows for a short time-to-market of new services.

As a result there will be quiet some advisors busy helping clients to revamp their contracts this and next year. Renegotiations which are this time not aimed at lowering prices, but removing the straightjacket which came with the sole focus on cost.

Preventing this kind of situation is not that difficult. It takes basically three things to keep in the back of your mind:

• Regardless of the toughness you are facing, do not forget the business perspective. Meaning, if  you are outsourcing IT, the might be tempted to look only at the effect the outsourcing has on the IT-function, forgetting the (indirect) effect it has on the business.
• Look at the total cost of ownership of the contract for the organization as a whole and not just the effect on the department outsourcing the activities.
• Do not believe advisors and vendors which tell you that outsourcing is a pies of cake without corners and hiccups. Outsourcing, even of standard activities, is rarely as simple as originally envisioned.

Added on May 5th 2010 (source:http://www.bpovoice.com/profiles/blogs/it-outsourcing-industry)

Unlike the hype in media reports, the recovery in the IT sector is gradual. A number of factors contributed to mid-contract reorganizations. Clients sought more pricing and contractual flexibility in the wake of the recession. Yet other firms were undergoing mergers and acquisitions, while some companies felt they needed to revisit their IT services contracts to meet current business requirements.

This is because IT outsourcing contract renewals are cyclical and predictable toward the end of the deal term, comments president of TPI Global Operations in an online report by businessweek: "Several of the larger examples took place well in advance of the scheduled contract end dates.”