Outsourcing renewals offer opportunity

As 1990s outsourcing contracts come up for review, firms are demanding better deals from incumbent providers

Increased competition amongst IT service providers could make it easier for IT directors to negotiate lower prices and better terms on outsourcing contracts, as many of the "mega deals" signed at the end of the 1990s come up for renewal.

According to a report published earlier this month by sourcing consultancy TPI, over a fifth of current large international IT outsourcing contracts - collectively worth almost $100bn - will come up for renewal over the next two years.

Duncan Aitchison, TPI's managing director, said this wave of renewals will provide opportunities for firms to negotiate improved terms. "The emergence of the Indian [service providers] means the outsourcing market is more competitive now than we've ever seen it," he explained. "Because of this and the limited nature of new mega outsourcing deals, the onus rests even more heavily on incumbent providers to retain deals. That will give opportunities on the buyers' side for better deals."

In particular, heightened competition could affect contract pricing. "You'd expect pricing [on renewed contracts] to move towards the market norm, perhaps [to a greater extent] than the previous contract allowed for," Aitchison predicted.

The wave of renewals also provides some firms with a chance to break up inefficient or unwieldy mega deals. "There are factors that favour incumbents [during contract renewals], but there is anecdotal evidence that some customers aren't retaining the incumbent for the whole of the deal," Aitchison said. "For example, firms may keep their present provider for running the datacentre, but might find it easier to migrate maintenance or application work to another provider."

However, he warned that any firm planning to significantly revise an outsourcing contract needs to plan the process carefully. "You need to be pl anning a good two years prior to the actual renewal," Aitchison warned. "You need to know if you are going to move to a multiple supplier strategy and ... have management in place to handle any transition."