End-of-contract decisions: Keeping pace in a dynamic outsourcing market

The end of an IT outsourcing or network services contract presents buyers with a clear set of options – you can renew the existing agreement as is, renegotiate existing terms, solicit bids for a new provider(s), or in some cases take services back in-house.

Making outsourcing decisions

While never easy, today these decisions are more difficult and complex than ever. For one thing, technology innovation and fierce competition are creating a constantly evolving and highly dynamic market. This means that rates agreed to at the beginning of a contract are very likely to be significantly out of alignment with competitive standards when the contract reaches the end of its term, due to the impact of market changes as well as scope creep and Move/Add/Change/Disconnect activity which can dramatically alter the original contract. As such, clients who simply renew an existing agreement almost certainly fall behind their industry peers.

A second factor to consider is the growth in the sheer volume of contracts that a typical enterprise must manage. Traditionally, outsourcing contracts were large, long-term multi-million dollar agreements that were subjected to intense scrutiny and oversight. Today, multi-sourcing is increasingly the norm, and a typical enterprise is characterised by myriad, increasingly specialised service providers and by increasingly shorter contract terms. As a result, buyers are faced with end-of-contract decisions on an ongoing basis. With new agreements to negotiate and implement, and new providers to integrate into the delivery model, executive must constantly manage multiple moving parts and evaluate numerous options and alternatives.

Benchmarking

Benchmark analyses of IT and business operations can be an effective tool to help manage end-of-contract decisions. By assessing the competitiveness of the current state and evaluating potential alternatives, a benchmark establishes a baseline of the 'as is' environment and quantifies the potential opportunity to be gained by a new solution. This enables an enterprise to not only gain its bearings on where it stands, but to define a desired future state as well as chart an optimal path to get there.

In recent years, benchmarks have fallen out of favor, as traditional approaches proved to be too costly, slow and cumbersome to be well-suited to the demands of today’s marketplace. Today, however, methodological and technology advancements have significantly enhanced benchmarking capabilities in terms of speed, cost and analytical scope. For one thing, the process of data collection – which historically relied on painstaking manual entry and spreadsheets – is now automated and can be done essentially in real time. In addition, advances in heuristics enable benchmarks to deliver forward-looking projections of how market trends and new technologies will impact pricing in, say, six to 12 months.

A holistic view

Access to deeper and broader data points across all IT and network spend towers is also key to effectively benchmarking in today’s environment. As IT and network operations become increasingly integrated, a holistic view of spend is essential to assess how costs in one operational tower affect other areas.

Successful enterprises are taking a more mature approach to applying benchmarks to a pricing negotiation. Armed with the results of a benchmark analysis, clients can be tempted to demand deep pricing reductions that go beyond market trends. Given the eagerness of incumbents to retain business and of competitors to unseat those incumbents, this approach can be relatively successful in the short term. Ultimately, however, it proves to be unsustainable.

For example, if a benchmark finds the leading price for a given IT service to be £1000, and a client strong-arms a provider into agreeing to £750, the provider is immediately in a position of losing revenue – and must immediately find ways to recoup those losses, either by billing add-on charges for out-of-scope work, by charging higher-than-market pricing for other services or by ensuring that the lowest-cost resources do the lion’s share of work on the account. Regardless, the relationship quickly loses any semblance of strategic partnership and devolves into contentious nickel-and-diming.

A more effective approach for both client and provider is to target a close range within the leading price – for that £1000 that accurately reflects the current state of the market as broadly defined over a sizable data pool and example set. If both parties agree that the price is competitive based on the leverage profile of the engagement, the conversation can shift to substantive areas such as SLAs, technology capabilities and service support and how to drive innovation and business benefits. Fair market pricing is just that, fair and at market.

For buyers assessing end-of-contract options, effective use of benchmarks can play a critical role in evaluating new technologies, modelling future scenarios and designing, implementing and managing operational transformation.

The challenge of transition

Another key to managing a multi-sourcing model is to ensure that effective processes and methodologies are in place around transitioning in new providers. The transition period is critical to the success of any outsourcing relationship, and while a successful transition lays a foundation for an effective relationship, an ill-planned and poorly executed transition undermines the new operation from the outset. In a multi-sourced environment characterised by constant change, effective transition processes become especially critical.

From the client’s perspective, the challenge of transition is to keep up with the rapid pace of change surrounding transfer of knowledge and resources and putting infrastructure and process in place. Clients who fall behind during the transition stage, meanwhile, face a serious risk of never catching up.

At a basic level, a sourcing transition can be approached as a project management exercise. A Transition Management Office (TMO), operating as a virtual organisation, can be structured to address high-level sourcing strategy considerations as well as the in-the-weeds details essential to keeping the transition on track. Typically comprising a core team of 10 to 12 members representing different stakeholder groups (business users, IT, HR, communications, procurement and finance), the TMO’s tactical responsibilities include orchestrating internal governance meetings that convene on a monthly or weekly basis, depending on the responsibilities of each team. By focusing on key deliverables and timelines, the TMO can keep pace with the transition process and ensure that critical details don’t slip through the cracks.

Finally, effective decision-making on sourcing options requires insight into provider capabilities, including not only the 'usual suspects' of tier one outsourcers, but of niche providers and new entrants specialising in emerging technologies. With industry expertise becoming increasingly important in many sectors, clients must ensure that providers have relevant experience and can demonstrate an understanding of key business issues.

Phil Hugus at Alsbridge