The research firm found that 15% of all contracts had been
renegotiated within what it calls the "honeymoon period" – the
first 12 months of the contract – leaving little hope for the
long-term success of the relationship.
The survey of almost 200 executives from midsize and large
companies in Western Europe also found that 55% of all enterprises
with existing IT infrastructure outsourcing arrangements have
renegotiated the terms of the relationship within the lifetime of
the contract.
Only 23% of survey respondents did not expect to enter into
renegotiations, meaning that nearly eight in every 10 outsourcing
relationships will go through renegotiations at some stage.
Only 6% were planning renegotiations to rescue existing deals,
confirming Gartner's view that relatively few companies are
actively looking to bring outsourcing back in house.
Problems leading to renegotiation
Lack of flexibility was the biggest issue for 50% of
respondents, closely followed by the need to improve the
supplier/customer relationship and to reduce costs. Forty percent
of service recipients believed they were paying too much for their
outsourced capabilities.
"Over the past four years companies have entered into
outsourcing agreements based on cost savings and short-term return
on investment, with little thought given to their sourcing
strategy," said Gianluca Tramacere, senior analyst, Sourcing at
Gartner.
"The majority of enterprises established long-term sourcing
relationships, based on current short-term cost-cutting
imperatives. These agreements usually lacked the flexibility to
accommodate the dynamic nature of the business environment and we
have warned enterprises that this inflexibility would end up
costing businesses more in the long term," she added.
According to Claudio Da Rold,
VP
for Sourcing at
Gartner, renegotiations should "become part of a proactive cyclical
process used to maintain alignment of expectations, reach the right
balance between service delivery and pricing and focus on end users
satisfaction".
This is particularly so because as outsourcing has become more
established, enterprises have gained experience and a better
understanding of their business requirements. Consequently, they
are now more mature and feeling more confident in their own ability
to select and manage the most appropriate vendor for each of their
IT
requirements.
"Recognising the importance of flexibility, some of the more
mature enterprises are now proactively incorporating a mid-term
review as part of their contract," said Mr Da Rold. "This should be
standard practice. While it is somewhat disappointing that only 16%
of survey respondents have currently taken this step, it is
nevertheless encouraging and we expect that in the future this
number will be much higher."
Gartner believes that the evolving approach to selective 'best
of breed' outsourcing is making and will continue to make life more
difficult for service providers. They will need to be ready for an
ever-evolving environment where they will be expected to support
the transition of specific service management competencies to a new
provider, warns the research firm.
"Service providers must understand that renegotiation will
become an integral part of relationship management," added Mr Da
Rold.
Due to the increasing level of maturity within the outsourcing
market, Gartner advises companies to place greater emphasis on
managing their relationship with the service provider.
Forty-five percent of survey respondents said that
communication with the service provider was the most important area
in which they would like to see improvements. Governance —
specifically clarification in terms of roles and responsibilities —
was highlighted by 29%.
Gartner also warns that as internal
IT
departments become responsible for acting as a broker of services
between business units and service providers, more emphasis should
be put on correctly acquiring the right mix of internal
skills.
The research firm put forward some advice for service
providers:
- Business and Market Dynamics: Ensure that propositions are
compelling: either low cost or high value. Don't get trapped in the
zone between being a niche and a one-shop-stop service provider.
Expect prices to fall, ability to continually reduce cost will be
paramount. Automation and the right onshore/offshore balance will
be key. Expect new competition.
- Relationship Management: Expect demands for increasing openness
and transparency.
- Culture: Develop world-class co-operation skills. Make
relationship management a differentiator.
And some advice for service recipients:
- Plans: Regularly review your sourcing strategy. Keep exit
management plans and inter-vendor transition provisions up to
date.
- People: Plan to spend at least 4% of your
IT
budget on the right internal team.
- Controls: Establish clear and strong sourcing governance – know
who is in control. Access existing contract structures and
measurement systems – ensure contract flexibility and alignment to
business needs.
