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Electronics Production | June 02, 2008

Why are organisations signing outsourcing contracts with renegotiation in mind?

IDC research indicates that in 2008, there is a possibility of some renegotiations within outsourcing contracts happening under the radar and it is critical for service providers to be extremely vigilant.
A recent report titled ‘Why are Organisations Signing Outsourcing Contracts with Renegotiation in Mind?’ found that during rebid cycles in 2007, 55-60% of outsourcing contracts in Australia were renegotiated.

“This was because of the fact that despite organisations and service providers (SPs) putting in measures to define clear outcomes from an outsourcing relationship, there is still a general perception that expectations on the scope and levels of service delivery are still not being met. IDC believes this is also due to the fact that organisations are unclear on what to expect from the end results, hence, are unable to clearly define the outcomes for the service providers before contract signing,” comments Aprajita Sharma, Research Manager Outsourcing and BPO.

The report also showed that in 2008 renegotiations will represent a slightly smaller proportion of total contract value (TCV) and will stabilise between 2008 and 2010, accounting for 35 - 45% of business signed.

"One of the main reasons for renegotiation is the client’s initial expectations of outsourcing and the resulting contract that is negotiated between the parties. If clients do not have a solid understanding of their own IT function and performance, or lack a focused IT strategy, then their expectations of outsourcing will be misplaced," adds Sharma.

"There will be increased outsourcing activity in 2008 and 2009 even though the average contract size has decreased by about 10% over the last 2 years. Increased activity in offshore outsourcing, which is driving down price levels for service offerings, is enabling organisations to purchase more services within the same IT budgets," concludes Sharma.

The report investigates and rates the reasons why organisations are being over cautious and creating leverage through the renegotiation process and blue-sky clauses within contracts.

IDC defines renegotiations as any significant change to the contract prior to its natural expiration. IDC does not consider renegotiation as including changes that are administered through the governance process (change management). Renegotiation does not include renewals that occur at the end of the term of the contract.

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