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Issue Date: March 2008

AnalystWatch: Flexibility demanded in outsourcing renewals

March 2008
Maxine Holt, Butler Group Analyst

Towards the end of the 1990s and at the turn of the millennium there were a lot of large IT outsourcing (ITO) contracts signed with the leading services vendors of the time. With many of these contracts now at or nearing their agreed end, we can expect further deals as customers take their decisions on whether to renew with the existing supplier or request proposals from alternative providers.

According to Butler Group's sister company CBR, it has been estimated that as much as 60% of the base revenue of some of the biggest IT services suppliers will come from renewals and extensions. But many of these suppliers could also find themselves under threat from the rise of multisourcing, whereby clients move away from large, broad-scope outsourcing engagements and sign more focused contracts with multiple, best-of-breed suppliers.
This may well give customer organisations additional leverage when it comes to renewal, but what will impact this decision and what are the pros and cons of renewing with a single IT outsourcing supplier or opting for best-of-breed from one/multiple suppliers?
Certainly customer attitudes to large ITO deals have changed - more flexibility is required today than 10 years ago. The ultimate level in maturity is to have an outsourcing agreement in which
payment to the service provider is, at least partially, based on realised financial benefits - this practice is known as 'gain sharing'. If the incumbent service provider is not prepared to meet their customer's flexibility requirements then they could well find themselves pushed out by an alternative provider.
The benefits that customer organisations perceive when renewing with a single ITO supplier include: maintaining the status quo (especially in cases of like-for-like renewal); there is no need to apply transition costs [to a new provider]; and the in-house monitored performance of the supplier will be available to help make the decision. There are, of course, disadvantages, and these include not having best-of-breed solutions available across the board. Some customer organisations see best-of-breed solutions through multiple third-party providers as the ultimate in responding to the needs of their particular organisation in a specific industry.
However, if an organisation decides to source all of these best-of-breed solutions/services itself then there will be a significant management overhead over and above that of managing a single outsourcing provider. As such, many customers opt to use one supplier (or even a small number of suppliers) to source the necessary best-of-breed services/solutions to cut down on this in-house management overhead.
IT outsourcing providers will need to provide the flexibility that their customers are looking for in order to maintain their income from these deals that they worked so hard on 10 years ago and throughout the agreement. Customers will undoubtedly be pushing for best-of-breed solutions/services to be included in their deals, be it with the incumbent provider or a new provider, and we do expect more of these large agreements to include subcontracts with the best-of-breed providers.

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