It’s time to renegotiate your IT outsourcing contract – Alfredo Saad

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Alfredo SaadAlfredo Saad – IT Outsourcing Consultant

Three scenarios recommend the renegotiation of your current IT outsourcing contract. Each of these scenarios shows distinct motivations and different objectives to be achieved during the renegotiation. Initially, let us define them through the perception of the buyer organization about how much its expectations are being (or not being) met.

  • 1st. scenario – Nothing seems to work in the contract.
  • 2nd. scenario – Contract no longer meets requirements.
  • 3rd. scenario (surprising!?) – Contract seems to work fine.

Let us discuss each of the proposed scenarios, taking into consideration their characteristics, the root causes that motivated their appearance and the objectives aimed during the renegotiation.

  • 1ST. SCENARIO – NOTHING SEEMS TO WORK IN THE CONTRACT

o             1st. scenario characteristics

Among the usual characteristics of this scenario we can find:

– Projected cost reductions do not show up.

– Provider performance is below (sometimes much below) expectancies.

– Relationship buyer-provider shows an intolerable degree of attrition.

– Business operations of the buyer organization are negatively impacted.

– Users’ satisfaction is progressively deteriorating.

o             Root causes of 1st. scenario

The appearance of this scenario is usually associated to failures during the IT outsourcing project implementation, as follows:

– A bad definition of the outsourcing decision drivers.

– An ambiguous and inconsistent selection of provider(s).

– An unskilled negotiation of contractual terms and conditions.

– An inadequate services transition.

– A weak or non-existent contract governance process.

o             Renegotiation objectives of the 1st. scenario

As a consequence of the deep contract maladjustment, two alternatives can be pursued during the renegotiation process:

– Contract cancellation and the subsequent resumption of the service by the buyer or its transfer to another provider.

– Contract continuation through the renegotiation of the contract terms and conditions aiming at fixing once and for all the problems identified.

Naturally, a pre-requisite to the achievement of an efficient and effective renegotiation is that lessons have been learned from all failures incurred during the initial IT outsourcing adoption process. As a result, each step of process must now be appropriately exercised.

 

  • 2ND. SCENARIO – CONTRACT NO LONGER MEETS REQUIREMENTS

o             2nd. scenario characteristics

This scenario shows some typical characteristics, as follows:

– Contract operations are reasonably efficient if we consider the contractual terms and conditions agreed in the contract signature.

– Effectiveness of business results achieved shows a decreasing trend because the agreed contractual terms no longer support the mutant requirements of the buyer organization.

– Buyer organization feels captive of a contract that still has a long remaining period (for instance, only 4 years elapsed of an agreed 10-year contract) with no clear perspective on how to adjust its terms to a new market dynamics.

o             Root causes of 2nd. scenario

The materialization of this scenario is commonly associated:

– To the rigid contractual terms and conditions that do not allow some clauses to be rehashed aiming at supporting the new requirements of the buyer.

– To the increasing speed of the adoption of the so-called digital disruption and its deep effect over the business requirements of the buyer organization, through the use of the new technologies such as cloud computing, big data analytics, internet of things, mobile apps, etc.

o             Renegotiation objectives of the 2nd. scenario

The renegotiation effort should concentrate on the review of some contractual clauses, or the creation of new ones, which can bring more flexibility to the contract, such as:

– Contract scope clauses that will reflect the new requirements demanded and eliminating those which have become obsolete

– Quality indicators clauses concerning the new service items created and eliminating those concerning the deleted service items

– Additional clauses to assure the future demands may be discussed without impacting the day-to-day operations of the contract, including those concerning the adoption of new emerging technologies In order to achieve such objectives, it is vital that the contract negotiation process be somewhat refined. The former process, as we can infer from the adequate current contract operations, was reasonably implemented, at least if we consider the original contractual agreed terms. Such refinement must focus, as we stated above, on the clauses concerning the agile and permanent fulfilment of new requirements.

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