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IT outsourcing relationships buckling under pressure

Derek du Preez | April 23, 2013
Almsot all CIOs want to retender one or more deals

A quarter of IT leaders across Europe are dissatisfied with one or more of their IT outsourcing (ITO) contracts and almost all (99 percent) would like to renegotiate or retender one of their ITO deals.

These surprising statistics have been revealed in a new report from sourcing advisor Alsbridge Europe, which surveyed 250 enterprises in the UK, Holland, Switzerland, and the Nordics. The results highlight that relationships between organisations and their IT outsourcing providers are in a fragile state and should serve as a warning to those entering new agreements in the near future, according to Alsbridge's managing partner Rick Simmonds.

Simmonds explained that lengthy deals done during the height of the economic crisis are proving to be troublesome for companies, having signed for commodity services to cut out costs,  but which are now not proving to be competitive enough in an environment of rapid technological change.

"I'm not surprised, there's a level of dissatisfaction with quite a lot of outsourcing arrangements. I don't think that there's a fundamental failing in outsourcing theoretically, I just think a lot of companies have got themselves into arrangements that turned out not to work very well after a few years," he said.

"There were quite a number of deals were carried out during the credit crunch for really aggressive cost reduction reasons."

He added: "Unsurprisingly a few years later companies are beginning to realise that they are not fit for purpose, they are not flexing properly, and that the cost savings that were provided up front are starting to bite as providers start to recover their investments. The deals were done pretty fast for the wrong reasons."

The report found that amongst those wanting to change their ITO deals, some 54 percent said it was because of changing technological needs, whilst 44 percent believe that they are not seeing enough innovation from their supplier. With the rise of virtualisation, cloud and mobile in recent years, there is an increasing possibility that companies are missing out on new technology that could benefit their bottom line and increase productivity.

Simmonds advises companies entering into new agreements to push for the shorter contract lengths, as contracts reaching ten years leave little room for customers to apply pressure to suppliers which know that their customer is tied into the contract for a significant amount of time.

"It's about building flexibility into the contract, I think that with very long term contracts you increase the likelihood of the technology radically changing around you and you being stuck in an old fashioned environment. Generally speaking contract should be on the shorter side - so three to five years, rather than seven to ten years," he said.


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