IT outsourcing: A buyer’s market

On the face of it, outsourcing is supposed to cut costs and improve efficiency. With a recession in full swing, it would be reasonable to expect the number of outsourcing deals would therefore be surging.

But Alistair Maughan, head of global sourcing at law firm Morrison and Foerster, which advises companies on outsourcing projects, paints a less sanguine picture.
“This is slightly different to previous recessions,” he explains. “The outsourcing market is more mature and there is less low-hanging fruit for businesses to outsource. The story is one of steady but not yet spectacular growth.”

Drawing on research conducted by the International Association of Outsourcing Professionals (IAOP), Maughan explains that 75% of organisations plan to continue or increase outsourcing in response to the recession, with greater contract flexibility the most reported need for outsourcing organisations at 44%.

A further 32% are seeking greater overall savings, while 29% are seeking to consolidate their outsourcing needs with fewer, larger providers.

“There’s definitely been a decline in mega-deals of over £1 billion, and a distinct slump in the last 12 months,” Maughan says. “Companies are focusing on small short-term initiatives, housekeeping and tactical restructuring.”

Meanwhile, an increased emphasis on quality (53% of companies said the recession had resulted in greater due diligence), and a focus on outsourcing as an investment decision rather than a cost saving measure, mean that customers are taking longer to initiate sales, Maughan adds: “Service providers are having to cope with a longer sales cycle.”

But due to a corresponding rise in the demand for flexibility, the length of those deals is shrinking.

“During the 1990s, ten-year deals were the standard,” says Maughan. “Now we’re seeing three-year deals, almost too short a time for service providers to recover their initial investment. Many are prepared to help their clients through the recession for the credit, and hoping to continue afterwards without having to go through a re-procurement process.”

Three-year contracts are the “minimum people contemplate,” Maughan says, but longer contracts are also seeing higher numbers of break points built in.

The companies that really stand to benefit from the current outsourcing market, he says, are small to medium firms “that don’t have the internal resources and are turning to outsourcing as one way to grow their business”.

Some of these companies, he says, “are demanding – and receiving – discounts from providers [of up to] 25% below the prices demanded two years ago”.

Maughan cautions against the temptation to drive quick cost savings by renegotiating pricing terms with existing outsourcing contracts.

“You can’t expect service providers to take hit after hit until there is nothing in it for them. Renegotiating the pricing alone is fairly one-sided,” he warns.

“Removal of unnecessary scope is an obvious place to start, but recognise that this is not a quick win where you can sit down and see what you can get. Obviously, there needs to be quid pro quo, such as an extension of term.” Another negotiating trick, Maughan explains, is to encourage innovation by passing down savings to the service provider.

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