For companies nearing the end of an ITO contract, there will be one dominant question in mind: Shall we stay, or shall we go? This is a big decision and one that needs to be done right, to avoid 3-5 years of putting up with something that isn’t fit for purpose.
In our experience, most IT leaders would prefer to renegotiate with their existing supplier, provided they are competent and the relationship is OK. This also makes the most financial and operational sense, as retendering can be costly and disruptive – not to mention the risks associated with bringing a new supplier on board.
Contract renewal should not, however, be a case of rubber-stamping. It presents an ideal opportunity to review the agreement, review the relationship, refresh business requirements and renegotiate the terms of the contract based on a clear strategy that is informed by business needs, market price data and expert advice.
This third party input is crucial; ITO companies have highly skilled and well-experienced negotiation teams at their advantage. Accurate market data and a clear understanding of what you can and should renegotiate will help to level the playing field.
Although usually the best choice, renegotiation is still difficult to broach with an incumbent, let alone execute. It’s to be expected, as suppliers won’t simply concede a great deal. But, with a well thought out strategy and a reason to talk, it’s more likely to be a success. Our recent study Terms of Endearment found that many IT leaders are now wary of renegotiation, but they needn’t be provided they consider the following:
1. New contract, new objectives?
Have your objectives changed? What are your long-term business challenges and technology needs? Things have changed dramatically since many of today’s ITO contracts that are coming up for renewal were signed, so new trends need to be considered such as BYOD, cloud computing and virtualisation.
2. Relationship management
Has your relationship suffered from poor management on both sides, from poorly implemented processes to misaligned service standards and reporting? These shortcomings must be addressed jointly, to improve the situation moving forwards.
3. SLAs
Review the service description and service level agreement, and redefine both parties’ expectations based on current industry standard models and your company’s broader objectives. Each partner’s role should be clearly defined to avoid any duplication of management or confusion about responsibility.
4. Market trends
ITO contracts can quickly fall out of line with the market, especially those signed under unusual circumstances or before a significant change in market trends. Work with an independent, specialist third party adviser to determine which terms and conditions need to be redrafted and renegotiated to meet current market norms.
5. Competition
Prepare a ‘proxy bid’, whereby you agree pre-specified increases up until a certain point, to ensure that you are getting a fair competitive analysis. This is better than issuing an RFP which can cost more and is less reliable.
6. Innovation framework
Definitions of innovation vary wildly and are not always discussed with the supplier up-front. Have a clear, pragmatic and ambitious innovation framework from the start and give the supplier room to deliver what you need.
7. Reinvestment
Consider reinvesting a portion of the avoided costs (of retendering) into the contract, to revitalise the relationship – for example through innovation.
Ultimately, the decision to renew or retender lies with the IT leader who will know what is best for them and their business. In summary, don’t rush into a decision: think about it nice and early. Then, develop a strategy. Lastly, if the relationship with the supplier is salvageable, try renegotiation before looking elsewhere.