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IT outsourcing contracts: Get the most from providers during recession

IT outsourcing contracts: Get the most from providers during recession

By  Linda Tucci, Executive Editor

06 Nov 2008 | SearchCIO.com

Paul Roehrig, who covers sourcing and vendor management at Forrester Research Inc. in Cambridge, Mass., says global economic pressures are forcing firms to drive cost-cutting even harder. Here is an edited version of Roehrig's six tips for getting the most out of your IT outsourcing providers if you're looking to tighten your belt:

What term best describes your service provider?
Forrester Research Inc.'s Paul Roehrig says you should think of your IT service provider as falling into one of three categories -- solid utility, trusted supplier or partner player -- and manage it accordingly. Or, as he says, your toothpaste, personal physician or spouse.

A solid utility signifies a provider that is a replaceable commodity -- like toothpaste -- usually hired to "keep the lights on" for less money and best managed by taking a "lion tamer" approach.

A trusted supplier is more like your personal physician, more difficult to switch from but not irreplaceable for a better value. Unlike the solid utility, the emphasis in this relationship is often on process quality, user satisfaction and productivity rather than just cost, and the contract is best managed with a "grammar school teacher" approach. Do the project right. Meet the service-level agreements.

The partner player is more like a spouse, intertwined with your success and costly and complex to split asunder. The mission -- to grow market share, create new products -- varies depending on the deal, and the risk to the business is high. The relationship is complex and requires subtlety and creativity. You should manage these relationships like an orchestra conductor.

Source: Forrester Research Inc., "New Market Pressures Will Drive Next-Generation IT Services Outsourcing"

1. Build and manage a deal that aligns with your IT and business environment. Are you looking for a utility provider or a shared-risk partnership? Consider which deal archetype best suits your business requirements, then structure a healthy outsourcing contract -- with forward-looking provisions for service. (See sidebar)

2. Build relationships knowing that the landscape will shift. IT service provider consolidation is not over. This is not necessarily bad for clients. Acquiring firms usually want to keep the clientele of the provider they're acquiring and may be open to cutting deals. Even so, sourcing teams should count on a topography that will continue to change with mergers, acquisitions and divestitures.

3. Structure contracts for those future provider changes. Change-of-control clauses should be structured to grant clients rights to terminate on their own timeline and protect against expenses associated with moving the work from the incumbent to another provider. Outsourcing contracts should also include provisions for significant revisions or termination with evidence of financial trouble (e.g., if the bond credit rating assigned by Moody's or Standard & Poor's falls below a stated minimum).

4. Embrace the global delivery model. The economic impetus driving outsourcing is that cost models are changing in virtually every industry, and the wage arbitrage lever can be a powerful tool to save money. Sourcing groups should challenge their assumptions about traditional definitions of IT "offshoring" and identify what really can and can't be delivered from lower-cost delivery locations.

5. Consider bundling lines of service along the IT supply chain. Successful IT outsourcing providers of the near future will be able to aggregate many lines of service, including infrastructure work, applications outsourcing, business process outsourcing, systems integration project work and consulting. Service convergence can be good news for buyers willing to craft a sourcing strategy that aggregates demand with a smaller number of providers linked together by a strong delivery process foundation.

More outsourcing news
IT outsourcing contracts drop sharply as recession takes hold

Outsourcing uptick result of slow economy

6. Use the current economic turmoil as fuel for an IT-to-BT transformation. Regardless of current weaknesses in the broader economic market, smart decision makers will leverage technology as a business accelerator rather than as a commodity cost. The evolution from IT to BT (business technology) should not go on hold, even in an economic recession. Service-level agreement architectures should include baseline operational metrics as well as business-oriented outcomes.

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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