IT services contracts must have several vital elements in order to avoid supplier relationships breaking down, senior delegates have said at the Forrester Services and Sourcing Forum in London.
Sanjiv Somani, managing director offshoring at Swiss investment bank UBS, likened contracts to houses, requiring basic elements to exist.
“In any house, you need a strong foundation, supporting walls and a roof,” he said. “The foundation is the business model that underpins everything you do with your suppliers.”
The supporting walls, he explained, are “talent, cost management, benefiting from time zones, language understanding, and provider selection”.
With regards to talent, it was vital to have the right expertise where and when it is needed, and for cultural and language differences between different teams and individuals to be overcome, he said. Cost decisions are a “balance between what you can pay and satisfying your demands for skill”, he said.
It was vital for firms to select a provider that operates within their own business model, he said, and if appropriate to make use of teams in different parts of the world, so that their in their time zones they can provide constant coverage.
UBS uses providers in Russia, China and Latin America, he said, to offer different services and to be reachable at different times.
Finally, there is “the roof, which brings it all together: the management of change and of the suppliers themselves,” he said.
It is vital to factor in flexibility, he said. “You never know what’s going to happen: you could have a change in management, there could be a change in strategy or even a fundamental alteration of your business model. You need to be prepared for this.”
Such changes often lead to contract renegotiation, especially when the original deal failed to make space for change, said Leandro Balbinot, director of global technology operations at brewer InBev.
The 89,000 strong company, which produces a range of beers including Stella Artois and is attempting to finalise a deal to buy Anheuser Busch for approximately $52 billion, had had a “bad” seven year contract it had renegotiated, he said, not disclosing whether or not this referred to major outsourcing deals it signed with IBM and BT in 2005.
“Most initial contracts are based on incomplete information,” Balbinot said, adding that companies often try to achieve annual cost cuts and forget overall strategy.
The original contracts that businesses sign often do not work later in their lifecycle, he said, because of “consumption increases, reductions in IT prices, or scope changes following acquisitions and divestments”.
Common mistakes firms make during renegotiation include aiming to change the entire contract at once, he said, and approaching suppliers before defining exactly what the the new aims are.
“You need to know what incentives you can offer to the supplier to renegotiate,” he said. “One of the best incentives is offering additional areas of business, and this is the best route to go, if you can.”
InBev regularly surveys its managers regarding supplier performance, he said. The company displays the results on dashboards for executive management to monitor how successful work is.
The calls for flexibility and fairness in supplier discussion reflect the experience of Procter & Gamble CIO Filippo Passerini, who told Computerworld UK last week that a fundamental change in the company’s negotiations had turned around the success of services contracts.
Passerini said the household goods giant makes sure it gives real incentives to suppliers and co-operates on long-term goals to make sure the contracts remain valuable to both parties.