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  1. Technology
February 27, 2009

Outsourcing contract renegotiations reach 20% level

Services contract must detail exit specifics: advisor

By CBR Staff Writer

One in five organisations say they have renegotiated prices on their existing outsourcing contracts.

A membership survey by the International Association of Outsourcing Professionals has found that a majority of companies still plan to pursue outsourcing, with many of them saying they had renegotiated pricing terms with their service providers.

The industry body expects that both the volume of deals and pricing levels in contracts will be lower this year.

“Nearly 75% of organisations reported that they will do the same or more outsourcing in response to the financial crisis and that greater contract flexibility is their top need. But 25 % reported lower volumes and 19% said they have renegotiated prices on existing contracts” the IAOP’s chairman Michael F. Corbett confirmed.

Sometimes pricing renegotiations break down, and is one reason why IT outsourcing has a high failure rate.

According to one study from DiamondCluster International, a Chicago management consultancy, as many as three-quarters of executives who have outsourced an IT function have had to terminate that agreement early.

Unravelling an outsourcing arrangement is complex and costly, and outsourcing consultant Michael Swinson of Morrison & Foerster cautions that vendors may seek to “even the scores” during the exit process.

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He reckons that over-pricing for transition assistance, and manipulation of staff transfers are two scenarios that CIOs need to be particularly aware of.

“Until the customer has a replacement supplier in place, it is very much at the outgoing supplier’s mercy. Unless the costs are agreed in advance, the outgoing supplier may use this leverage to over-charge for post-termination transition assistance.  On the other hand, the customer cannot necessarily expect to continue receiving contract pricing, which may have been based on a greater volume of work over a longer contract period. The fairest way to price on-going assistance in these circumstances will often be to apply agreed time and materials rates.”

Where the outgoing supplier is based in the UK, there is a good chance that some of the outgoing supplier’s employees will automatically transfer to the new supplier under applicable TUPE regulations.

According to  Swinson, “The outgoing supplier may see this as an opportunity to ‘manage’ its workforce by rotating staff so that only ‘dud’ staff will transfer across to the new supplier and high-performing staff will be retained by the outgoing supplier.  To protect against this, the customer should specify that, once a termination notice has been issued or in the last 12 months before the agreement is due to expire, no staff changes will be permitted without the customer’s prior consent.”

He said that the supplier may also push for a general exemption for staff changes in the ‘ordinary course of business’, so that its ability to continue running its business as normal is not unduly restrained.

“The exit process will generally run more smoothly, and any acrimonious behaviour can often be avoided, if the supplier has a continuing incentive to keep the customer happy” the outsourcing advisor said.

 

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