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19 July 2005
Eversheds IT Outsourcing
The third global IT outsourcing study by DiamondCluster identifies some interesting trends, and some key lessons to be learnt by both customers and suppliers, in the IT outsourcing market. What is clear is that a well structured outsourcing contract is essential to ensure that the issues and concerns raised by the report are effectively managed and the associated risks successfully mitigated. This e80 assesses the DiamondCluster report from the customer's perspective. Almost all of the two hundred or so buyers that participated in the survey have outsourced at least some of their IT functions. Of these, 74% expected their use of IT outsourcing to increase, though the report found some evidence of a decline in the popularity of offshore IT outsourcing, which is not surprising given that satisfaction rates for moving offshore have dropped from 79% in 2004 to 62% in 2005. The key reason cited by customers for choosing to outsource an IT function is their perceived ability to re-allocate internal resources to more critical functions. The function where IT outsourcing demand is at its highest is application maintenance and support, as opposed to more business-critical IT functions. Some of the other themes running through the report are: 1. Measuring performance levels - one of the more surprising conclusions of the report is that a number of the buyers surveyed did not have enough measures in place to identify whether or not the outsourcing is a success, even if the relationship had been in place for a number of years. Secondly, even when measures are in place, they were often seen, with hindsight, as misconceived and therefore incentivising performance which does not actually benefit the customer. It is paramount that an IT outsourcing contract includes specific, easily measurable targets that focus on meeting the requirements of the customer. The report also found that although a number of customers impose a service credit mechanism on their suppliers (i.e. some sort of reduction in revenue, following poor performance), there is far less evidence of rewards for exceptional performance, indicating a continuing adversarial approach to outsourcing transactions. 2. Termination - the percentage of the buyers surveyed that had terminated an outsourcing relationship in the previous 12 months more than doubled from 21% in the 2004 report to more than 51% in 2005. This is a clear indication that suppliers are not be meeting the needs of their customers, especially as the main ground cited for customer termination is poor supplier performance. Buyers need to ensure that, in addition to having the necessary contractual rights to terminate for poor service delivery, the contract includes a clear exit strategy that is agreed upfront and then continually reviewed as the relationship develops. This will ensure, on termination, that the outsourced function can be brought back in-house, or transferred to a new provider, with minimum service interruption. 3. Variable capacity needs - a significant trend identified by the report is that the capacity requirements of a customer are increasingly variable over the term of an IT outsourcing relationship. Therefore, the contract and particularly the fee structure, should be sufficiently flexible to meet such changing needs. A customer should ensure that the contract is adaptable, with enough flex so that the customer is not left relying on a generic change control procedure and as a result being held to ransom over costs, if it needs to increase service capacity for a short period. 4. Multiple providers - management complexity is seen as the greatest risk associated with IT outsourcing, particularly because of the range and increasing number of service providers that a customer must manage and co-ordinate. The outsourcing contract should consider this risk and document how a supplier should interact with both existing and other future suppliers of the customer. Simon Gamlin, Solicitor -------------------------------------------------- Eversheds LLP is a limited liability partnership, registered in England and Wales, registered number OC304065, registered office Senator House, 85 Queen Victoria Street, London EC4V 4JL. Regulated by the Law Society. A list of the members' names and their professional qualifications is available for inspection at the above office. For a full list of our offices please visit www.eversheds.com |
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