The devil you know

The devil you know

One in five Australian organisations that currently outsource their IT needs will either change suppliers or give up on outsourcing altogether, according to analysts, META Group.

As contracts from the outsourcing boom of the late '90s and early 2000 come up for renewal this year, there is an expectation that the IT services market will face increasing pressure to lower prices and increase their level of service to satisfy a much more experienced and learned customer. While the majority of Government departments and large corporations are likely to stick with their incumbent supplier to reduce risk, the terms of such renewals may send some outsourcers reeling.

“Many organisations are now much more experienced in working deals with IT vendors, and are using more benchmarks and forcing prices down,” senior program director for service management strategies at META Group, Wissam Raffoul, said.

“Many lessons have been learnt,” general manager of marketing at KAZ Group, Kevin Ryder, said. “We have noticed an increasing number of consulting groups being hired to help end users negotiate for better deals.”

Raffoul said there were several organisations that had been burnt by IT outsourcing over the past few years that would gladly end their relationships as soon as their original contract expired.

“Many of those would have liked to break the contract already, if not for the financial penalty for doing so,” he said.

For the majority of organisations, however, Raffoul said there was a tendency to “stick with the devil you know” rather than go back to tender. Raffoul said the typical tender process might take six to twelve months, and there was often another 12 months involved in establishing a suitable working relationship with the new supplier.

“It takes a lot of work to change vendors, in terms of both cost and risk” he said. “Many people believe that there is no one vendor that has shown outstanding performance over any other to date, so unless the relationship is not working at all, they stick with the devil they know.” IT outsourcers cannot afford to be complacent, however.

Raffoul said while dissatisfied organisations might still renew their contract to reduce risk, they were also likely to be more “selective” about what they outsource.

A look at recent outsourcing deals that had been renewed or extended show a marked trend towards organisations making significant changes to the scope of their contracts whilst renegotiating.

Organisations such as the Australian Taxation Office, Customs and Energy Australia have all recently renewed outsourcing contracts but pulled several components out of the agreement.

Raffoul said that most commonly the customers were pulling out the telecommunications and application development components of the contract. They were also looking at adjusting the leasing periods on equipment and take some assets back in-house.

“It means that suppliers may be winning back the business, but not all of the business,” he said.

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