Without dedicated and ongoing governance, carefully negotiated and documented rights in an outsourcing contract run the risk of not being enforced, and the relationship that develops may look nothing like what you envisioned.
IT organizations put great focus into drawing up their outsourcing contracts, but those agreements alone do not guarantee satisfactory outcomes. Attorney Brad Peterson has seen it time and time again. “Time and money are spent on drafting the contract—often a substantial amount of money. And a tremendous amount of potential value is created in that contract,” says Peterson, partner in Mayer Brown’s Chicago office and leader of its technology transactions practice.
But then the engagement is handed over to a well-intentioned supplier management team that wasn’t involved in the contract and often can’t make heads or tails of what’s in it. “It’s understandable. Contracts are complex and confusing, and relationship managers are selected based on their knowledge of technology or their skill in building relationships, not on their knowledge of how to run a contract,” Peterson says.
Those professionals managing the engagement often don’t understand how their conduct or communication can impact their company’s legal rights, which can cause a number of problems should disputes arise. “The result is that the benefits for which you negotiated hard and are paying great amounts may be lost,” says Peterson. What’s more, disputes may be more difficult to resolve, and those that aren’t becoming costly to litigate, requiring interviewing dozens of witnesses and sorting through thousands of emails to figure out what has happened and who is responsible.
The real value of IT outsourcing is achieved through active governance—not only of the projects in play, but of the communication and interaction between customer and provider. “Protecting the value of the contract after the ink is dry is about motivating suppliers to deliver on their promises,” says Peterson, “and preserving remedies for failure.” Peterson and Robert Kriss, litigation partner in Mayer Brown’s Chicago office recently share some best practices for governing the IT outsourcing contract once the ink is dry.
1. Control your communication
If someone on the customer side isn’t already designated in the contract, send a notice to the service provider at the start of the engagement identifying one employee authorized to speak on behalf of the customer. IT service providers are savvy. If they want to push a change in approach or document through, they will find the employee most likely to sign off on it. By designating one spokesperson, “You avoid the inadvertent but unfavorable change that occur to your contract when lower level people are approached by the provider to approve a procedural manual, for example, that ends up changing the obligations of all the parties,” says Kriss. “That makes it clear up front and in writing who represents and can bind the customer. It’s just good for the relationship and will result in fewer misunderstandings.”
Designating a customer representative enables the IT organization to control messaging, better adhere to the contract, and avoid situations where the communications or conduct of less informed personnel create ambiguity and uncertainty. And when disputes arise, you’ll only have to review the email of the one person whose communication has legal relevance versus dozens.
2. Require the provider to log requests and complaints
In many outsourcing situations, the only obligation of the customer is to pay the supplier. Not so in IT, where engagements required the customer’s contribution or collaboration. “The customer will tend to have obligations, and if the customer doesn’t perform those obligations, those may be an excuse for performance,” Peterson says.
However, should the IT outsourcing provider have a request for the customer or raise an issue of customer performance that it says excuses one of its obligations, it’s important to compel the provider to write the issue down and keep a log of all such problems.
Require a log showing requests and responses on contractual matters.
3. Clarify cloudy terms early
It’s important to keep the written record of the engagement as clear, complete and accurate as possible. When there are projects or situations that the contract does not explicitly address, the customer should clarify them early on and in writing. “That’s the best time to reach agreement because the parties are most open to cooperation at that point,” Kriss says.
If the details of a more granular project isn’t specified in the main agreement, write down a summary of what each parties responsibilities are and have everyone sign off on that before embarking on their work. “If there’s clarity in the written record, the likelihood of the situation getting worked in the context of outsourcing relationship is much greater,” says Kriss. “It matters so much.”
4. Send breach notices right away
Peterson sees customers who endured problems in their outsourcing relationships for years, but had no record of them because they thought sending notices to the provider would create tension or contention. That’s a mistake. Customer should send a written notice of breach or failure the very first time it occurs—and every time thereafter. “This needs to be a standard best practice that a company always uses,” Peterson says. They need not be combative, but rather polite and factual. “If you can establish that pattern, particularly with a single person comfortable sending these notices that are clear and useful, you will establish a much better record,” Peterson says.
All customer employees interacting with the service provider should be instructed to notify the designated customer representative if they think the service provider may have breached the contract. The designated representative can check with legal counsel to decide whether to send a breach notice. Without this written record, an IT organization can lose its rights to terminate for cause, for example. “A judge, jury, or arbitrator might well conclude that if a breach was not important enough to merit a written request to cure it shortly after the breach occurred, the particular breach should not later be considered alone or with other breaches as a sufficient basis to terminate the agreement,” Peterson says.
5. Never do the provider’s work before demanding the provider do it
When a project is faltering — the provider is missing milestones or a system is underperforming, the customer may be tempted to jump in to get the job done. However, if a customer takes action without warning the service provider in writing that it intends to do so and charge for the resources, the customer is likely to be stuck with the bill.
IT leaders should never assign their personnel to perform work that ought to be completed by the service provider without sending a notice of breach and providing an opportunity for the service provider to fix the problem. “That’s just fair,” says Kriss. “And fair is what matters in the context of dispute resolution.” The notice should state that if the supplier does not improve performance by a specified date, the customer will take steps to address the problem and will charge the provider or reduce its payment to cover the cost. Providing an estimate of those costs will support the case for reimbursement if the dispute is ever litigated.
6. Look for win-wins
An IT service provider at some point is likely to offer a waiver on a credit due for a breach and, in many cases, that is an opportunity for the relationship manager to trade that waiver for some future assurances. They might trade a performance credit waiver for a larger assurance on a future milestone or a root cause analysis of the breach and demonstration that the issue has been fixed. This approach “increases the change of successful outcomes, and you build a relationship built on trust and mutual understanding,” Peterson says.
7. Talk to legal counsels early—and often
If it isn’t clear already, creating a clear and written record of the engagement is important to preserving an IT organization’s contract rights. And “lawyers have an eye and ear for evidence and how documents will play in front of a judge or jury,” says Kriss. “They can be very helpful in essentially creating evidence helpful to the resolution of the matter through settlement or dispute resolution.”
Lawyers can find rights that are not apparent on the face of the contract and help the customer resolve issues. It may make sense to call a lawyer when there is a potential dispute involving a breach of the contract, when the provider asks for new charges for what appears to be in-scope work, or when modifying the master agreement, for example.
Clarity is the goal of contract governance
The goal of contract governance is to provide greater clarity. “With greater clarity comes greater certainty as to how a dispute will be resolved,” says Kriss. “That clarity increases the likelihood the parties will be able to resolve it and avoid litigation. If for some reason the cant, the record will be clear and reduces the cost of dispute resolution.”
These suggested governance practices are relatively easy to implement, says Peterson, and, if thoughtfully implemented, should not antagonize the service provider but rather reduce misunderstandings and keep the relationship on track.
An incumbent IT service provider may be a good option for implementing new technology solutions, but you should take these four steps to most effectively integrate disruptive technologies into your existing outsourcing deals.
In the era of digital disruption, the ability to successfully implement new technologies such as mobility, big data and analytics systems, cloud computing options, or robotics for competitive advantage is critical. In some cases, going to an existing IT service provider may not be the best way to do so. However, in many cases, there are advantages to working with incumbent supplier. Doing so may enable IT outsourcing customers to leverage existing contractual commitments and terms to accelerate the contracting process.
Business and IT leaders may want a trusted partner to manage their entire technology environment. By expanding the scope of an existing deal, the customer can retain integrated performance standards and service levels for the entire environment and maintain streamlined governance processes. It also may be a way to minimize any transition or termination costs.
The challenges of integrating disruptive tech into an existing contract
However, the integration of disruptive technologies into an existing sourcing arrangement can present a number of new challenges, says Linda Rhodes, partner in the Washington, D.C. office of law firm Mayer Brown. “The contractual rights and protections available to the client in important areas — such as control rights, approval rights, audit rights, intellectual property ownership rights and post-termination rights—are likely to be different in many respects,” Rhodes says.
“The pricing models used for disruptive technologies, such as cloud, everything-as-a-service and autonomics or robotics, are also likely to be very different.” What’s more, the existing IT service provider may have to rely on a subcontractor to deliver some of these capabilities.
In addition, there are potential issues common to expanding the scope of any IT outsourcing contract. There may be transition charges to consider. “Moving to a new technology solution will require transition work, including designing the new solution, developing a detailed transition plan, determining the road map for the migration, and migrating to the new technology,” Rhodes says. “Implementing new tools, including reporting tools and processes, may also be necessary.” Customers must build such additional costs into their business cases.
Moving to a new technology solution could result in the termination of all or part of the existing agreement for convenience or trigger minimum commitments, resulting in continued payment of minimum charges or termination charges. “Working in the context of your existing contract, you may have leverage to negotiate around certain termination charges,” says Daniel Masur, Partner-in-Charge of Mayer Brown’s Washington, D.C. office and a leader of its business and technology sourcing practice. “But certain termination charges, such as stranded costs, may not be negotiable.”
Stranded costs can include equipment that becomes irrelevant. “If the client owns or leases the equipment, it is likely to have equipment that is not at end-of-term or end-of-life at the time of migration to the new solution,” Masur says. “If the provider owns the equipment, then the provider will have stranded costs and want to pass those costs onto the client through termination charges.”
Similarly, there may be third-party maintenance contracts that will have to be ended with their own associated termination fees. In addition, the outsourcing client may have leased space that is no longer needed with the new technology solution. That, too, must be factored into business cases and planning.
Steps IT outsourcing customers can take to integrate disruptive tech
First and foremost, clients should define the optimum process from the beginning. “Do not feel constrained to link the negotiations with contract renewal,” Masur says. “Instead, be driven by the objectives and requirements of the business.” Companies should also define the role of the incumbent outsourcing provider in this process.
Secondly, companies should perform a detailed cost-benefit analysis. This evaluation “may be more complicated than the cost-benefit analysis associated with traditional transactions,” says Masur. “Often, the impetus for the new technology solution is more than just cost savings. The anticipated benefits may include improvement in time to deploy, end-user productivity, speed to market, cost of inventory, marketing effectiveness, customer renewal rates, and so on.”
Third, outsourcing customers should not underestimate the change management challenges and considerations. The company’s employees must be willing and able to adopt these new technologies and processes in order to extract their intended value. “Be honest regarding your organization’s willingness to embrace change, relinquish control, accept a vanilla one-to-many solution and forego customization,” Masur advises.
Finally, clients should create and maintain negotiating leverage throughout the process. To that end, “it is important to create deadlines and a sense of urgency and to maintain the specter of competition,” Masur says. “Be sure you understand what the supplier wants out of the process and build that into your strategy.”
How vulnerable are your contracts to failure? In the recent series of posts on contract retention, I showed you how to undertake a contract vulnerability analysis. In the post 6 steps to Improving Contract Retention I made reference to the STaRS Model from the book The First 90 Days by Michael Watkins. Using this model can provide you with an effective tool that will allow you to understand how vulnerable your contracts are, and what you need to do as a leader to grow these contracts or to re-energise them.
The book was originally written to assist leaders to make successful transitions into new roles. Like all good models, STaRS is a simple concept but deep in meaning and application.
There are effectively 3 layers to the model and I have therefore chosen to split this into a series of three consecutive posts. Which will cover
• The 4 stages of contract vulnerability
• The 3 strategies to Sustaining Success
• Matching the required leadership skills to contract vulnerability
This series of posts will set out the situation that you are likely to encounter when reviewing a contract and provide you with a means of understanding what is happening and what action you need to take to remediate the situation.
I first read the book at the time that I was moving from one job to another more senior role in another company. I wanted to use the book to help me set out a strategy for the first 90 days to understand the new business I was joining and my role in it. Michael Watkins’ premise in the book is that Executives in transition must gain a quick and deep understanding of their new organisation and adapt to that reality within the first 90 days.
Whilst there is a lot more to the book than just the STaRS model it became apparent to me that the model was applicable to Contract management. After all the business of a Service provider is a combination of a number of small businesses that we call contracts. Each contract must be run as a separate and distinct business and as such the premise of the model hold true.
The STaRS model lends itself to reviewing each individual contract as a business at different stages of development. No two contracts are the same and no one size fits all approach. So in order to avoid the problem Mark Twain paraphrased “if the only tool in your box is a hammer then every problem will look like a nail”. We need a framework for assessing the contract, which will allow you to tailor your strategy accordingly.
It is important to understand that long contracts tend to move along a predictable continuum, rarely are there catastrophic failures, which take a contract from a stable situation to termination. Rather there is a foreseeable transition process through which contracts pass on their way up or down the continuum towards success or failure. It is at those points that your strategy determines the fate of the contract.
Using the STaRS model you’ll be able to recognise the clear differences between the different situations and the strategy and skills that are required to bring about positive change.
The first thing to note from the model is that there are fundamentally five states of a contract including Shutdown. The termination of a contract needs no introduction or explanation and in most cases is a stage that we want to avoid. There may be a situation where you may want to exit from a contract but for the purposes of this model we will not dwell on this here
Firstly the model does three things it provides a largely predictable path, which all contracts will travel at some time in their life-cycle. Secondly, the model neatly categorizes the different stages of a contract into 4 clearly distinct phases, all of which have individual characteristics. Thirdly and possibly most importantly the model sets out 3 cycles, which describe the journey between the stages depending on whether you are succeeding or failing.
In all situations one wants to bring back the contract to the Sustaining Successplatform for it is only from this stage that the contract can grow.
The 4 STaRS stages are follows
- accelerated growth (not really a stage and will be covered in the next post)
- Sustaining Success
In the contract Start-up phase, the prevailing mood is one of excitement and enthusiasm as well as a degree of confusion. More often than not contracts are started following an accelerated timetable of mobilisation. This is a period of change for all parties, both our staff as well as the Client.
The leader’s job is to channel the energy into productive directions and to assemble all the capabilities resources and technology to get the contract off the ground.
The challenge is to build and implement the contract including the operating strategy and getting systems up and running from scratch. You will be responsible for recruiting and welding together a high performing team, whilst having only limited time and resources.
This will be a period where personalities are sizing up each other and all of this has to be accomplished without affecting the clients business and at the very least maintaining the service standards that were in place prior to your contract. The signature on the contract is still wet and you are still on probation. Failure to adopt and adapt at the Start-up phase will lead to termination before you have had a chance to progress.
Whilst you can get bogged down in the changes there are a number of opportunities available to you during this period. You’re in on the ground floor, you’re a fresh broom with the ability to sweep clean. You have the chance to impress and get things right from the beginning.
If you have managed to undertake your change management right your new team members will be energized with the possibilities on the contract. You will have a team of transferring employees who are looking forward to the challenge of being at the centre of your companies focus. This is a world of endless possibilities and there should be no rigid preconceptions of what is achievable.
In a Turnaround situation, your job is to save a contract from the next step which is termination. It is highly likely that the contract which is widely acknowledged to be in trouble. In an honest appraisal of the events, the group of people on the ground are likely not only to be aware of the situation, but they have known they are in trouble for some time.
We may be dealing with a team that has been like a rabbit in the headlights, paralysed, directionless and leaderless. Alternately there may even have been willful neglect, whereby everyone knew what was happening but nobody actually grabbed the bull by the horns and did anything to remediate the situation. In either situation, there were road signs along the way have been ignored and you will be dealing with a group of people who are close to despair.
The challenges will be to immediately re-energise a demoralized group of employees and crucial stakeholders. You’ll be called upon to make tough and effective decisions under time pressure.
They’re looking for a leader to take charge and provide light at the end of the tunnel. You will need to undertake resource intensive reconstruction work and need to make tough calls early.
In situations such as these, it is important that the leader goes deep enough with painful cuts and difficult personnel choices. It is crucial to the ongoing morale of the team that is left behind, that you cut once only and so you need to cut deep. You do not want to be in a situation where six months down the line you have to repeat the process. This leaves the team totally demoralized and not knowing whether those left behind are safe.
Whilst this is an unpleasant exercise to have to go through with what is necessary to survive.
In the case of willful neglect, it is likely that everyone recognises that change is necessary but nobody has had the courage to execute. In the case where the team is hapless and clueless, your job as the leader is to communicate the need for change. Whilst there will be casualties, if you have done this with empathy everyone will recognise that change is necessary and that those left behind will feel safe and empowered to deliver.
As a leader, your job is to ensure that the affected constituencies are offered significant external support. Not only is this the right thing to do it is important for the other team members that are left behind see you that they will not be left to fend for themselves.
Where the vulnerability process identifies a contract that requires Realignment, this is akin to a minor procedure as opposed to the major transplant surgery required in a Turnaround situation.
As the model indicates, contracts that require the deep and painful process required by a Turnaround situation have almost certainly gone through the Realignment stage without anyone recognising the need for minor corrective action.
In a Realignment situation, your focus as the leader should be on re-energising a previously successful initiative that has drifted into trouble and now faces problems.
Unlike the Turnaround situation, it is unlikely that the team in place will recognise the signs and so the major obstacle that you will have to meet head on will be to pierce through a veil of denial that is preventing people from confronting the need to realign the contract. The challenge, therefore, will be to convince employees that often deeply engrained cultural and operational norms are no longer contributing to high performance and change is necessary.
Do not underestimate this situation. Whilst the size of the behavioural change may be less than a Turnaround situation the challenge will be in getting the team to recognise that change is required however small that may be. This will require careful negotiation and adroit skills at managing egos in being able to refocus the team.
The once successful contract will in all likelihood have significant pockets of strength upon which you can build. You are likely to have a client who is a significant ally and still has enough invested in the contract to see it succeed. The support of the client will be a significant rallying point for the people who need to be able to continue to see themselves as being successful.
4. Sustaining Success
In this situation the contract is humming along, performance is above expectation and you are likely to have significant wins under your belt. Confidence in you and your team is high. This, of course, is a great place to be as the leader. However, you need to be aware that the potential exists to slip into the Realignment stage. The preservation of the vitality of the contract and its relationships is your responsibility and you need to take it to the next level by growing the business.
Things are going well but you need to exercise caution, this is not the time to coast. Sustaining Success is the only platform from which you can grow the business. This means that the team will be required to do their day-to-day job in running the contract but in addition, run with up-selling and cross-selling initiatives. Beware, detraction from the day to day issues is a very real danger.
Unfortunately, it is a reality that clients will not entertain your advances in terms of additional scope or services if the day-to-day issues are being left unattended or worse still there are service failures. You, therefore, need to play a good defensive role before embarking on too many new initiatives and/or services. As a leader, your challenge will be to find ways to keep your team motivated and combat complacency as well as finding new directions for growth from an organisational and personal capacity.
With a team who feels that they are on top of their game, you may need to invent a challenge to stretch their capability and capacity and find a new direction for growth
Your previous successes will undoubtedly mean that you have a strong team is likely to be in place. This does not mean necessarily that day will be the right team to instigate new initiatives and supplementing the team with sales personnel for the up-selling and cross-selling initiatives may well be required.
The window of opportunity may be fleeting but growing the contract requires a continual balance with the daily operational needs. The foundations are undoubtedly in place that your people will need to be continually motivated to continue the history of success.
In your assessment of your contract’s vulnerability, it will fall into one of these categories. If you are in Sustaining Success well done, you have a platform from which to build. I will talk about the Growth Cycle in the next post but beware, this has its dangers too. If you are in Turnaround or Realignment you need to work at getting the contract back to the Sustaining Success platform. I will talk about the different strategies in the Recovery Cycle the Crisis Cycle in the next post as well.
Robotics and automation are hot. But what do they really mean in the context of your IT outsourcing contract? At least for now, they are not about robots rolling around the data center floor or application development center. Robotics and automation are about software and tools that allow for automated processing, monitoring, and reporting, which provides real-time data and data analysis and a reduced need for manual (read—“human”) intervention. Many vendors are touting proprietary tools and solutions that enable more automation, resulting in more accurate and timely information and services and lower costs.
The following are five key contract considerations for outsourcing customers considering automation:
- Software licensing and maintenance. For proprietary products, many vendors are licensing their automation software as a standalone offering with standalone pricing. Third-party license and maintenance costs may also apply if the proprietary products require specific operating systems, middleware, or application software to operate.
- Software configuration, interfaces, and implementation.
- Incremental infrastructure and capacity.
- Costs of Automation. Automation projects—at least at the outset—may not be without incremental expense. When considering an automation project, consider the one-time and ongoing incremental costs, and balance those against the anticipated efficiencies and benefits. Costs of automation may include
- Documented Benefits (Upfront and Ongoing). Automation sounds great, but what are the real benefits? As with any implementation, it is important to document a project’s intended benefits and the effect on the existing scope. Will there be a change in services? Will there be additional or improved service levels or reporting as a result of the automation?
- Sharing of Reduced Costs. One effect of automation may (or may not) be the reduction of required headcount. If headcounts are reduced because less people are needed to provide a service that is not “automated,” will the fees be adjusted? What are the adjustments? Does the contract provide for an adjustment regardless of whether a vendor can actually reduce the headcount? Customers should consider including a requirement that headcount cannot be reduced until a vendor can demonstrate that the documented benefits have been realized.
- Ownership of the Output. Automation tools, particularly ones with data-analytics capabilities, generate data and reports regarding a customer’s environment. Who owns this output, and what can it be used for? Customers should be sure to include in an outsourcing contract clear rights on ownership and use of data.
- Back-End Considerations. The tools have been implemented, are running, and are integrated into a customer’s environment. What happens if the contract terminates? Will the customer have ongoing rights to use the automation tools (and the related configurations and interfaces)? On what terms?
IT professionals are buzzing about Gartner’s newly coined term “bimodal IT”, a method of service delivery that allows IT teams to split their focus into two separate, coherent modes: stability and agility. The latter encompasses day-to-day IT operations, which are essential to the safety and reliability of an organisation’s IT environment. The former is centred on innovation that allows the IT team to experiment and identify new ways of using technology to meet the fast-evolving demands of the business.
Today, according to Gartner, 45 per cent of CIOs use a bimodal IT service management strategy. By 2017, Gartner predicts that 75 per cent of organisations will have implemented bimodal IT strategies. In a different survey by a separate organisation, however, the majority of CIOs – 63 per cent, to be exact – said their IT spending was weighted too heavily toward the maintenance side of IT, leaving little room for new projects.
Lack of resources to dedicate to innovation is a challenge for mid-market businesses especially, as they typically have limited IT staff, and the staff they do have are too consumed with troubleshooting and helpdesk issues to drive new developments.
So how are the majority of businesses going to adopt a bimodal approach to IT service delivery within the next couple of years if the modes are imbalanced? For some businesses, the solution lies with managed services.
Bimodal IT and managed services
Some organisations are choosing to outsource basic IT functions such as helpdesk, which allows the IT unit to take a more holistic role in the business. With the changes in the nature of IT sourcing, Gartner believes that smaller IT suppliers will be able to respond rapidly to requirements, while also scaling quicker solutions by utilising cloud capabilities.
By outsourcing IT functions to a managed service provider (MSP), internal staff are then free to invest more time in IT innovation that allows the business to remain agile in a competitive marketplace. But while innovation plays a key role in advancing the business, organisations can’t afford for their service delivery times to suffer. For a business to have a successful MSP relationship that doesn’t detract from the organisation’s future progress, the business should ask the MSP the following questions:
Are you able to accommodate our current and future IT needs?
It may seem obvious, but it’s crucial for an MSP to have experience supporting the specific functions that will be outsourced. If a business is outsourcing the helpdesk, for example, any IT vendor that will be working on hardware should have engineers that possess a variety of skills and are fully qualified to repair equipment from an array of manufacturers (having someone without the proper qualifications work on equipment could void manufacturer warranties). The MSP will also need to be equipped to support any new technologies the business plans to implement in the future.
What are your guaranteed service levels?
The MSP’s promised service levels must be backed by service level agreements (SLAs), and the business must carefully examine these SLAs to ensure they align with the organisation’s goals and expectations. If possible, the business should also evaluate the MSP’s service quality by having the provider demonstrate typical response times and provide quantifiable metrics of success.
What degrees of support do you offer?
To prevent operational IT issues distracting the IT team from new projects, the business needs to contract the amount of coverage that guarantees the MSP will resolve IT issues satisfactorily. MSPs typically offer varying degrees of support, such as 24/7, remote or on-site support. If the MSP doesn’t offer a package that meets the organisation’s needs in terms of both budget and support coverage, the business might need to request that the MSP create a customised solution.
For businesses to stay afloat in a competitive marketplace, technological innovation is a must. Although mid-market businesses might struggle to implement bimodal IT strategies with dedicated in-house staff, working with an MSP can free up the time and skill necessary to focus on progress and ensure their spot as one of Gartner’s projected 75 per cent of businesses that have implemented a bimodal strategy.
Awareness of the increasing risk of cyber attacks is prompting a growing number of organisations in the Middle East to enter into outsourcing agreements in relation to their telecoms networks and systems, an expert has said.
Diane Mullenex, a specialist in telecoms and IT contracts at Pinsent Masons, the law firm behind Out-Law.com, said the trend was reflected in new figures on the size of the outsourcing market across Europe, the Middle East and Africa (EMEA).
“The sourcing market in the Middle East is not as mature as in other parts of the world, owing in part to the fact that there has traditionally been a practice among organisations present in the region to carry out tasks internally or through special purpose vehicles with partner organisations rather than to outsource them,” Mullenex said. “However, there are two main factors that are beginning to shift attitudes towards outsourcing.”
“Firstly, the reduction in the price of oil has brought about price pressures in countries such as Saudi Arabia and forced local administrators to consider ways of making efficiency savings. Outsourcing is a generally accepted way of achieving this. In addition, across the region there are a growing number of public contracts, particularly in areas such as defence, which are being put out to tender as organisations seek to access the latest, most sophisticated and secure telecoms networks and communication systems in light of growing cyber risk they face.”
According to the latest outsourcing index published by the Information Services Group (ISG), the cost of outsourcing and the length of outsourcing contracts are generally falling globally as a result of the move towards greater use of cloud services, digital technology and automation.
ISG said “cloud, digital and automation drive down average award values and contract durations” and that this had been reflected in the fact that it had seen “the lowest annual mega-relationship activity in 10 years” in 2015.
According to ISG, there are 3,114 “active” outsourcing contracts with an annual value of at least €4 million across EMEA. It said the EMEA outsourcing market in 2015 was worth €57.9 billion, up from €35.8bn in 2006.
Although ISG charted a rise in both the volume and value of outsourcing agreements concluded in the final three months of 2015, it said that overall figures for the year showed the market had shrunk compared to 2014. Last year there were 601 outsourcing deals struck in EMEA, down 7% on 2014, and the total annual contract value of those deals was also down 8% on the previous year at €9.4bn.
There was a record high number of outsourcing contracts concluded in the UK in 2015, ISG said. However, it said the total annual value of those deals was down on 2014 figures.
Despite the weaker performance on 2014 levels, the total value of outsourcing contracts concluded in EMEA in 2015 accounted for nearly half of the total value of all outsourcing agreements struck in the world last year (€19bn), according to the ISG figures.
Across the globe, ISG reported a 12% reduction in the value of IT outsourcing contracts concluded in 2015. IT contracts expert Sarah Cameron of Pinsent Masons, the law firm behind Out-Law.com, said this reflects the “continuing shift to smaller deals” being seen in the market.
“Although there are some record counts, the annual contract value is still falling off,” Cameron said. “The bulk of this is down to the fall off in IT outsourcing because of the shift to cloud. This shows the continuing trend of digital transformation disrupting the traditional outsourcing market.”
“There has been a general reduction in recent times of so-called ‘megadeals’, however the ISG research charted the fact that some major deals struck in the latter months of 2015 helped boost EMEA market performance. However, these megadeals were not enough to buck the overall downward trend in the market,” she said.
According to ISG’s report, the average length of outsourcing contracts agreed in 2015 was three and a half years. In 2006, the average contractual period was five years. ISG’s figures also showed that the average annual value of outsourcing contracts put in place in 2015 was €13.1m, down from €19m in 2006. However, the number of outsourcing contracts agreed globally last year was, at 1,445, more than double the 741 deals recorded in 2006.