TERMS OF ENDEARMENTCONTACT

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MAKING IT WORK

MAKING IT WORK...

“Effective renegotiation is all about the right planning, approach, data and assessment of the situation”Rick Simmonds, Managing Partner, Aecus Europe

According to our research, two thirds (65%) of IT leaders do not believe their ITO suppliers would be open or approachable around contract renegotiation. Almost half (48%) even think they would “kick up a fuss” if they tried to revamp their deals.

As a result, two fifths (39%) feel “locked in” with their existing ITO suppliers.

While this might be the status quo, this imbalance of power is all wrong. Outsourcing might feel like a marriage, but there is no “til death do us part” and clients and suppliers alike should be expecting and preparing for a review of the existing terms of the agreement when it comes to the end of the contract.

Both parties have obligations to fulfil, and this is perhaps the hardest part: honouring previous commitments, recognising unrecovered investment and addressing contractual and operational issues on both sides – as opposed to moving the goalposts and demanding more for less. Clearly, this takes time, and almost half (46%) of the IT leaders we spoke to admit they need to start the renegotiation process earlier next time around.

In Terms of Endearment – Part One: We Need to Talk we learnt that many IT leaders are dissatisfied with their existing IT outsourcing (ITO) relationships and looking for change. They want to redefine their needs, restructure their ITO relationships and – crucially – avoid the mistakes of renegotiations past.

This is a positive revelation; one that clients and suppliers both stand to benefit from if the next wave of ITO contracts does – as clients intend – reflect the current market and their long-term business and technology needs. And yet, setting ITO contracts on the right track can mean having some difficult conversations.

In many cases, IT leaders have a solid case for updating their ITO deals. But it is naive to think this will be an easy conversation, as it is all too easy for this to look like a one way street to the incumbent supplier. The result can be defensive behaviour, which has a negative impact on both service and the relationship.

The elephant in the room has grown, because – as our research reveals – many IT leaders perceive there to be a closed door. They may have been rebuffed in the past, or lack the confidence or information to have that awkward but necessary conversation with their supplier.

Effective renegotiation is all about the right planning, approach, data and assessment of the situation. To uncover how IT leaders are tackling these challenges, we interviewed 250 senior IT decision makers from leading companies in Europe’s most mature ITO markets (UK, Holland, Switzerland and the Nordics).

In this report, we reveal the root cause of missed opportunities for improving ITO relationships and share key survival skills for renegotiation teams.

In Aecus’s experience, clients are most surprised by: More than half (57%) of the IT leaders we interviewed admitted that they do not have an overarching sourcing strategy in place, while two fifths (42%) have no formalised review point in their ITO contracts – both of which can smooth the path to renegotiation.

Our study also suggests that clients are entering negotiations with a “them versus us” mindset, when in fact the most successful decisions regarding contract changes are made in partnership. So, how do you turn a one-way conversation into a two-way dialogue? By presenting a legitimate claim as part of a well-developed renegotiation plan, and knowing what issues and requirements you need to discuss before you set the wheels in motion.

TOP 5 SURPRISES WHEN RENEGOTIATING AN ITO CONTRACT

1 The emotional reaction of the incumbent supplier

2 The realisation that you can’t always get what you want

3 The incumbent supplier playing hardball

4 The time and effort it takes to achieve successful outcomes

5 The impact of culture on renegotiation experience

CHANGING MINDSETS

OF IT LEADERS FEEL “LOCKED IN” WITH THEIR EXISTING ITO SUPPLIERS

39%

As any IT leader who has been through ITO renegotiation will confirm, it is a complex process with many key variables, competing objectives, huge responsibilities and a significant investment for the business. Yet, provided the relationship is OK and the supplier is competent, this is generally more cost effective and less disruptive than going out to the market.

A clear renegotiation plan should not only help you to manage your team and timings; it should form a blueprint for what you need to walk away with at the end of the process. In support of this, it should acknowledge what you are happy to concede, your role and responsibilities in making sure the relationship works, and any issues that you need to knock on the head.

The strategy should also indicate at what check points you need to source external legal and business advice, to help you make the most of the opportunities that renegotiation presents. Two fifths (40%) of IT leaders say they left too many details to be decided after the contract was signed. It is always advisable to try and get it right first time, and to keep the process moving in a linear fashion – rather than trying to work out what went wrong after the event.

PLANNING FOR THE FUTURE

Before you sign on the dotted line, take a moment to step back and consider:

• Do I understand who is responsible for what, and what I must pay?

• Do I understand how the charges will alter if my requirements change?

• Is this deal likely to still look good in a few years’ time?

• Can I get out of the contract at a reasonable cost, if I change my mind?

• If it were my money, would I buy into this contract?

As this study shows, making ITO relationships work isn’t straightforward but it is achievable – provided you take the right approach. As with many complex business processes, you really do get out of it what you put in.

The good news is, more than half of IT leaders plan to appoint a bigger or more skilled renegotiation team (54%) and invest more time in these proceedings (51%) in the future. With many of today’s contracts that are coming up for renewal having been signed under time and cost pressure during the recession, and now running into problems, there has never been a better time to ensure that the next wave of ITO contracts is built to last.

When appointing a team, check for:

TOP 5 SKILLS FOR RENEGOTIATION

1 Experience of similar renegotiations

2 A full understanding of the company’s business needs

3 Knowledge of all the options

4 Courage to use those options if required

5 Patience to structure a deal that is beneficial to both parties

SOURCING INFORMATION

Nearly three quarters (71%) of IT leaders told us they don’t have access to the necessary information to renegotiate their ITO contracts. Presenting a clear business case for change is often thought to require a contractual benchmarking clause, but not everyone has one of these and more than half of IT leaders (52%) say they don’t work anyway.

If the contract doesn’t support your needs, clients can look outside of this and – as far as pricing is concerned – can use market price data to provide a framework for discussion. This is independently verified, up-to-date, readily available and undisputable, and can be employed to determine a fair price for the level of service and value that you want to see returned.

Aecus’s ProBenchmark data, which provides the latest market intelligence, reveals that ITO market rates have fallen by 25.7% on average since the beginning of 2010, with the biggest reductions occurring in storage (56%), telecom (43%), server (23%) and mainframe (20%) services. Clearly, it pays to know how things have changed since agreeing your last contract, and to consider this in the context of the unique requirements of your business.

A client’s negotiation team will almost invariably be at a disadvantage to the supplier’s, because they do not have the same level of experience or training. However, a clear strategy can also give everyone on the team a good idea of what success looks like. This can be hugely empowering, and there is always the option to pull in strategic advisors at key points in the process to help steer the conversation back towards a mutually agreeable conclusion.