IT contracts can have a lot of pitfalls. Deciding to renegotiate is a big step but for many clients the last few months have exposed partner weaknesses that are too large to ignore. Nearshore Americas breaks down some of the reasons to pull the trigger, along with some tips on how to navigate the change.
Change in business environment
A vendor management office (VMO), or similar structure, can be a huge assist in helping the relationship to navigate through a changing business climate. “While vetting of vendors is usually done prior to selection, and in theory the best vendors are chosen, that doesn’t mean that vendor stays the best vendor over time,” says Tim Norton, founder of VMO Benchmark LLC. “Clients with a formal VMO, and clients with solid relationship management, will survive longer and see their contracts execute to end date, while vendors often enjoy easier renewals and new opportunities.”
It’s not news that an IT outsourcing contract is only as strong as the relationship between the vendor and the client. It is also not surprising that these relationships are imperfect. However, a buyer has to be clear as to whether it is worth it to renegotiate, or simply to wait for expiry, and to switch then.
“Some of the unforeseen ramifications of an IT contract renegotiation include the potential of price increases and early termination charges,” says Clay Calhoun, partner, Sourcing Solutions, with Information Services Group (ISG), a global technology research and advisory firm.
“As well, there can be a degradation of services if the current supplier believes the enterprise client is likely to move to a new supplier.”
Since most contracts are between three and five years, a buyer needs to do the math, and to determine whether an early exit is really the most viable strategy.
Sometimes, the job simply isn’t getting done, and business outcomes and value are not being delivered. A customer should know this simply by referring to the contract. “It is good practice to benchmark the contract relative to scope, quality and price a year into the agreement – depending on the term – to ensure alignment with the market,” says Calhoun from ISG.
“Re-negotiations should begin at least a year before the end of the contract to ensure completion of the agreement.”From there,the transition to the new state would typically be validated prior to expiration of the prior agreement. But if the vendor isn’t delivering, then there should be no surprise if the buyer is willing to renegotiate – and at times on aggressive terms.
A need to diversify
At time, the need to renegotiate isn’t really anyone’s fault. Instead, it reflects the fact that the market has changed, and that other providers within the ecosystem are more competitive and innovative. In this circumstance, waiting it out may not be viable. However, if this is a reason for renegotiating, do your homework beforehand. “Before starting the negotiation, identify realistic alternatives,” says Martin Ewing, principal at Charleston, SC-headquartered Pactoris Technology Partners, which assists Information Technology (IT) organizations with cost reduction / containment, contract negotiations, and technology procurement.
“It’s important to remember that a vendor is not going to give up an advantageous position if they believe the client has no realistic alternative. Alternatives may not always be a competing vendor, but could also be reductions in the amount of products or services going forward.”
Key stakeholder turnover
When there is turnover within the provider organization, and the client finds itself in a new situation, the IT outsourcing agreement can be vulnerable. The reverse can also be true: the client organization might turn over senior management, and that new team may not be pleased either with the terms of the outsourcing agreement, or with the performance. In these circumstances, a renegotiation needn’t be the end of the relationship. In fact, with patience and good will, an agreement can be fine-tuned in such a manner that contract continuity is preserved.
A security breach is an obvious reason to re-assess, and even renegotiate, an IT contract. You need to determine the seriousness of the breach, and whether it was due to personnel, or technology. Here, trust is a huge factor, with IT playing a central role in the vendor relationship. “IT should be making many calls on risk and security based on what is being asked of the vendor,” says Norton.
However, legal may have a role to play here, too, in that the vendor has to come clean on the breach, and on what remedies are in place. Full accountability can save an agreement, but attempts to cover up, or to avoid responsibility, are red flags.
The Wrong choice
It sounds simple, but sometimes mistakes are made, and a client finds itself a year ina three- or five-year contract, and it realizes that it didn’t properly assess the marketplace. What to do? If you are in this position, take the time to put a clear strategy in place.
Make sure innovation and sustainability get a hearing, and not only cost reduction. Don’t threaten to end the relationship without a plan – or a desire to execute on that plan. Align your enterprise team, and take the time to proceed at a decent pace, with a goal-oriented schedule. Take into account all the details, and their implications, including the end of term, and what happens to IP, equipment, software, and supplier staff.
Do all this with an eye to pulling the trigger while there is still enough time in the original contract. At that point, you will be ready to announce your intentions.