What to consider when IT outsourcing contracts come up for renewal

Technologies, models and consultants

As well as different models and contracts to consider, technology has shaken things up. Today increasing numbers of IT services are based in the cloud, which changes the nature of contracts and delivery. Then there is the automation software and artificial intelligence (AI) shaking up the IT outsourcing sector.

The increased pace of technology change and the speed at which consumers are changing their habits could also be a calling for business consultancy. Businesses today are re-inventing their businesses to fit the habits of the digital age. Choosing the right technology and services contracts to fit with a transforming business might be something CIOs will need support with: Business and IT consultancies might have to enter the renewal equation. 

Then there is globalisation to consider. Today CIOs have a number of choices in where to have services delivered from. It is no longer the case that India is the first choice, as there are locations throughout the world offering their own advantages.

When renewal time arrives

“When a contract comes to an end, the client firm gets an opportunity to do things differently,” said Ilan Oshri at the Centre for Global Sourcing and Services at Loughborough University's School of Business and Economics.

Oshri said there are two questions organisations should ask themselves: “Are we going to renew and, if so, what will change in the new arrangement? And are we going to bring work back in house – and, if so, how are we going to do that?”

For the first question, he said the opportunity is to examine the latest models and technologies in the market.

“For the second question, bringing work back has become a real option for many firms, but there are still obstacles," said Oshri.

"Firms should regularly assess their ability to re-integrate the service, be in a sound financial position to bear additional costs involved in bringing back the operations and an exit plan that ensures the transfer of knowledge from the supplier.”

Unprecedented change

Outsourcing consultant Jean-Louis Bravard – who was a CIO at JP Morgan and headed global financial services at IT services giant EDS in the past – said CIOs should think about outsourcing agreements all the time, and not just when they are coming to an end.

He said planning for change now might be more complicated than last time around, due to the level of change in the last five or 10 years. “The world has changed dramatically. So any contract signed even five years ago is fundamentally obsolete. And, to make matters worse, I think the rate of change is not about to drop in the next five years.”

Bravard said CIOs should organise their thoughts around certain themes.

He said the big US suppliers such as Hewlett-Packard (HP) and IBM are all trying to protect their business from in-sourcing and Indian players in IT, as well as more international suppliers in business process outsourcing (BPO).

Meanwhile, the advent of software robots will force major changes to IT and business process outsourcing. “The human consequence on employment is obvious but increasingly the CIO will have to become responsible for all production and interactions. Glitches will longer be tolerated and fault tolerance and redundancy will be absolutely critical for all,” he said.

Bravard added that another major change in the last few years is how pay-as-you-go services have transformed. CIOs as well as suppliers must understand what this means to their businesses, he said. “Even internal solutions must be priced ‘by the drink’ and most often with a downward slope. This presents a huge challenge on pricing and funding for both users and suppliers.” 

Mark Lewis, head of outsourcing at law firm Berwin Leighton Paisner, said that, as revewals approach, CIOs should be thinking strategically rather than tactically.

“First, strategically, how they can benefit from either renewing the current contract or going to the market potentially for a new provider or providers. The stress here is on strategic, rather than tactical, decision making,” he said. “It has been tempting for many CIOs to consider at a tactical level the disruption and cost of retendering, as well as taking the approach of ‘better the devil you know’.” 

He said logic and market forces dictate a retendering exercise, and there is no reason not to include the incumbent. “There is the task of persuading the rest of the market that this is genuinely an open process and that the outcome isn’t a foregone conclusion.” Otherwise, he said, the most promising potential providers will be deterred from bidding.

Support your decision with action

He urges CIOs ensure they have the right exit plans in place. “When outsourcing contracts near the end of term or are coming up to termination for whatever reason, one of the big – and more often than not – painful and too-late lessons learned by CIOs and their operational and contractual colleagues is that their exit plans and processes are not fit for purpose,” said Lewis.

If existing plans are not sufficient, the CIO will be forced into a corner, he said. “If plans are not fit for purpose, there is an understandable desire by CIOs and their other colleagues not to endure the pain of separation from the incumbent provider – unless the pain of separation is going to hurt less than staying with the incumbent.”

He said a robust exit plan should address the hardware and software assets used to provide the services at the time of transfer, and similarly third-party assets and contracts, people, operations libraries and manuals: "In other words, all the people, tangible and intangible assets and know-how necessary for an incoming provider to make sense of the services before or at transition.”

Then, he said, the exit plan needs to contain the necessary processes and actions for a a smooth handover to an incoming provider.