Reshaping ITO Deals - renegotiation without wrecking the relationship

A new study by Alsbridge reveals that IT leaders found that IT leaders are widely dissatisfied with how their ITO agreements are meeting their rapidly changing needs, and are seeking change. However, they fear supplier resistance to reshaping...

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A new study by Alsbridge reveals that IT leaders found that IT leaders are widely dissatisfied with how their ITO agreements are meeting their rapidly changing needs, and are seeking change. However, they fear supplier resistance to reshaping ITO deals through renegotiation.

This is hardly surprising; many contracts coming up for renewal today were signed as a knee-jerk reaction to cut costs during the recession. Frequently, we also found that too many key details were left to be decided after the contract was signed.

In addition, businesses are increasingly focussing on new opportunities such as BYOD and cloud computing to stay competitive. Some of these IT megatrends were hardly a consideration when today’s deals were signed, let alone a key business priority.

Market prices have also shifted dramatically down - even in the last three years - according to Alsbridge’s ProBenchmark data. As a result of all of this, today’s deals could be wildly out of line with the best of the market.

While it is encouraging to see that CIOs are determined to realign ITO deals to the business needs, our latest study reveals that this will not be an easy process. It is easy to fall into a positional rather than interest-based negotiation, and the hard truth is that unless a reshaped deal works for both parties, it probably won’t work at all.

The right approach

According to our research, two thirds (65%) of IT leaders do not believe their ITO suppliers would be open or approachable about contract renegotiation. Almost half (48%) think they would “kick up a fuss” if they tried to renegotiate with them. As a result, two fifths (39%) feel “locked in” with their existing ITO suppliers.

Whilst this is regrettable, it is also understandable. In the current economic climate, where new deal volume is down, it can be easy for suppliers to see this conversation as a one-way street on which they always lose. They would also be right to complain if clients move the goalposts and fail to honour previous commitments or to recognise unrecovered investment.

However, if there are real business and technology issues that need to be addressed, then it is incumbent on suppliers to be receptive and find a way to change the deal to meet the client’s changing needs. This applies even more when the contract is nearing its end of term. Here suppliers may need to change their mind-set, which too often is perceived as defensive and conservative. Deals are structured for a set term, and at the end of that everything should be open for reshaping. An ITO relationship is not a marriage with a lifetime commitment, even if it does feel like one from time to time!

So, how do you turn a one-way conversation into a two-way dialogue? By legitimising your requirements through the use of market data regarding both solutions and pricing, and by presenting this as part of a well-developed renegotiation plan.

Strength in numbers

Three quarters (71%) of IT leaders believe they don't have access to the necessary information to renegotiate their ITO contracts, while more than half (52%) say benchmarking clauses - a common contractual feature - do not work as planned.

Over half (57%) admit to not having an overarching sourcing strategy in place, while two fifths (42%) have no formalised review point in their ITO contracts - both of which can smooth the path to renegotiation.

Having access to current market data is vital to developing a strong business case for change. It takes the emotion out of the proceedings, and necessitates a more principled discussion with the supplier.

Many IT leaders feel they can’t do this because their contractual benchmarking clauses simply don’t work (too narrow, too prescriptive; too toothless) But this shouldn’t stop them from accessing market data to make a persuasive case for change outside the contract structure.

Levelling the playing field

Of course, having the right information at your fingertips is one thing. Putting that into action and navigating the renegotiation process with all of its sensitivities, bartering and critical decision-making is quite another.

A supplier’s negotiation team will almost inevitably have more experience and training under its belt than any client’s. However, clients can counter this through preparation and a clear renegotiation plan, and assembling a team with relevant experience and the courage to renegotiate well.

Given the rapidly changing market and the consequent current high levels of demand and expectation clients have of their ITO contracts, it is clear that more must be done to make sure that the next generation of ITO agreements is fit for this new world. Making ITO relationships work isn’t straightforward, but it is within every CIO’s reach. With the right mindset, supported by the right data and a clear plan, clients and suppliers can ensure that future deals are built to last.

Alsbridge interviewed 250 senior IT decision makers in the UK, Switzerland, Holland and the Nordics. To download a copy of the latest eBook - Terms of Endearment: Making IT Work - please click here.

Posted by Rick Simmonds founder and managing partner of Alsbridge plc.

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