Think it’s easy to get out of a short deal when you want to switch outsourcing providers? Think again. Exits from short deals can be costly, time-consuming and disruptive.
In today’s dynamic business and technology environment, companies have embraced the flexibility that comes with shorter term IT outsourcing deals. And at a time when niche specialty providers continue to proliferate, outsourcing customers may assume that it’s relatively easy to get into — and out of — these smaller IT services deals.
However, exits from short-term IT outsourcing contracts can be costly, time-consuming and disruptive to the business, warns Paul Roy, business and technology sourcing partner at law firm Mayer Brown.
“Customers may assume they can move the service to a different provider or back in-house, which gives them ample leverage to negotiate extensions if needed,” says Roy. “They may also assume that they do not need longer-term protections since they can update their agreements on renegotiation.”
While either of those might be true in some instances, that shouldn’t be a chance companies are willing to take with potentially complex or mission-critical technology service. “In those instances, the customer is more likely to be dependent on its ability to negotiate extension terms,” Roy says. “As lawyers well know, necessity seldom makes a good bargain.”
Identifying and qualifying replacement providers (or creating an in-house alternative), negotiating new terms, and transitioning the services will require a significant amount of time and money. And the more customized or complex the service being replaced, the greater the risk during switchover. And the more critical the service being provided, the lower a company’s tolerance for potential disruption.
“The risk comes from potential for error at the time a replacement provider takes over the service,” says Roy. “This cost and risk have less to do with the size of the deal and more with the complexity or customization of the services and whether they are mission critical.” It could be cost and risk-prohibitive, for example, to jump from short-term deal to short-term deal in supporting a treasury system that integrated with a company’s customers and serves as an end-to-end solution.