Tag: ITO contracts

There’s a US$90 Billion Dollar Party Going on – Are You Invited? Advice on Winning Upcoming Outsourcing Contract Renewal Opportunities | Sherpas in Blue Shirts

While there are increasingly fewer first generation outsourcing opportunities, a large number of IT outsourcing (ITO) and business process outsourcing (BPO) deals are coming up for renewal over the next 18 months. With US$90 billion in total contract value at stake, the renewal market provides cause for excitement or concern, depending on where your organization stands.

If you are a service provider with hefty contracts coming up for renewal through end of 2014, and have yet to agree to terms with the clients, you should be worried. Very worried. Chances are that your competitors have already formed teams of “hunters” and are circling your prized relationships, waiting to pounce. The reality is the incumbency win rate is falling from the 90s to the mid 80s, and is likely to plummet further, as buyers see renewal time as an opportunity to implement positive change:

  1. In a challenging business environment, enterprises are looking to alter contract structures to bring in stronger accountability for outcomes from service providers
  2. Buyers are increasingly open to unbundling large, sole-sourced contracts, thereby undermining relationship profitability as incumbents lose the opportunity to cross-subsidize deal components
  3. Enterprises are also using renewal time to shape and execute portfolio level strategies, as they seek to use more aggressive offshoring, leverage specialized and smaller niche players, or consolidate portfolios across a few key service providers

Following are several key components Everest Group recommends you include in your defend (your own) and attack (your competitors) contract renewal game plans:

Defense

  • Pinpoint vulnerable accounts and establish executive level connects long before the contracts come up for rebid
  • Identify competitors that may be eyeing your relationships
  • Address key concerns from clients. This can be tricky because your clients may not necessarily open up to your account managers. Having an outside-in perspective helps
  • Anticipate hearing, “There’s nothing wrong with you guys, we just decided to change our direction.” Here, you need to consider how well aligned you are with your customers. Can you walk your talk, and their walk? In certain cases, you might need to evaluate whether you want to end up cannibalizing your own revenues as the client wants to move to new operating models.

Offense

  • Identify competitors’ accounts under threat, and the clients’ key concerns
  • Pin down clients’ pain points and their associated fit with your capabilities. But note that these first two activities are challenging without having a neutral party the buyers can open up to
  • Generate focus within the sales organization. Have dedicated sales teams going after specific accounts, armed with messages that are likely to resonate, and are aligned with the prospects’ thinking
  • Beware of inheriting the poisoned chalice! There are certain accounts you want to avoid (and that your competitors will be happy to let loose)

It is unlikely that you will need just a pure offense or defense game plan. You might have to fight tooth and nail to retain certain relationships, but if you go about it the right way, there are large opportunities for incremental shifts in market share.

Let the US$90 billion dollar party games begin!

For drill-down data and insights into outsourcing transaction trends by function, geography, industry, and service provider type, and implications for key stakeholders (both buyers and suppliers), please see Everest Group’s newly released report, “Impending Contract Renewals: A Futuristic View of the Renewals Market Place.”

Can Outcome-based Pricing Replace “Till SLAs Do Us Part?” | Sherpas in Blue Shirts

ITO deals in which service providers’ compensation is linked directly to the business outcomes they achieve for the clients have started gaining prominence. While the idea has been around for some time, and indeed should be part of a gradual evolution process from pure FTE or T&M models through to gainsharing arrangements, we’ve observed with interest both parties’ strategic interests (see image below) converging through shared business outcomes on several mega deals.

ITO Deal Demand and Supply Forces

A number of clients have recently asked for our advice and insights on the upsides and downsides of outcome-based pricing models. Following are the factors we told them they must carefully consider before asking their providers to make the change:

  1. Trust:  Ask yourself, “Do I really trust my partner?” Use your common-sense. Outcome-based models are often used in combination with a base T&M model in situations involving complicated deployment of new technology, where both parties share the risk.  However, not everything goes smoothly in such situations, so don’t fall over yourself to shout “Penalty!” You might need to arrive at a negotiated outcome once your partner admits to an honest, unforeseen mistake. In other words, incentivise your provider to make it right, rather than masking the flaw and investing in a sub-optimal environment for the duration of the contract. The latter is the road to poor relationship health, contract disputes, and a frustrating end-user experience.
  2. Corollary to the Trust Principle, be prepared to Cede control: If the implementation partner is responsible for improved business outcomes, the team needs to have control over the business process and the underlying stack, including platforms, management, and reporting tools, and quite simply…the way you do business. You can play the powerful investor, but let your partner be the empowered CEO. Share your powers.
  3. Identify scope accurately: Building on the above point, the scope is often beyond the obvious. Mere implementation of an ERP system won’t raise productivity or prevent revenue leakage if the overlying process is inefficient. State the scope in line with your desired outcome. For example, scope is not, “implement ERP”; it’s “raise productivity by XX% by implementing ERP and optimizing the accompanying process.”
  4. Know the price of improved outcomes: Most providers won’t tell you they build a risk premium into their base fees on outcome-based models. In other words, while you are encouraging your partners to take on more risks, they want to cap the downside. Remember that they don’t want to, and sometime can’t, back out of a contract. Thus, if the desired outcome cannot be reached, they would have spent significant time and effort without recompense. So, you must carefully evaluate the business case for an outcome-based model. Is the scope large enough? Are the benefits of transformation deep enough?
  5. Make it stick: Arguably, this is the most challenging part, as it’s  often difficult to establish causality between the provider’s performance and business outcomes, making “Cede control” (point #2 above) even more important. In addition, governance models must be suitably evolved and often supported by sophisticated management tools and chargeback mechanisms. Keep in mind that these come with a cost and, consequently, must be built into your ROI model.

At the end of the day, an outcome-based model is a bit like marriage – it represents the triumph of hope over experience. So be clear about why you are getting into it, choose your partner carefully, share space, and who knows – you could live happily ever after!

Video: Key Highlights from Everest Group Report on Impending Outsourcing Contract Renewals | Sherpas in Blue Shirts

In June 2012, Everest Group released a flagship report titled “Impending Contract Renewals – Back to the Future.” The report covers in extensive details trends around outsourcing contracts that are reaching end of term during the period between April 2012 and September 2013. Analyses performed include industry, geography and service provider category trends.

Everest Group’s analyst Soumit Banerjee shares some of the key headlines from the report.

Can your IT Outsourcing Contract Coexist with the Cloud? | Gaining Altitude in the Cloud

This blog originally appeared on Gigaom.com. Read the original post.


If your enterprise is committed to a long-term managed services or information technology outsourcing (ITO) contract, you might be looking longingly at the agility and efficiencies of cloud-based delivery models. If you’re like many enterprises that rely on managed services, you might be less than thrilled with the quality, responsiveness and flexibility you’re getting. Cloud seems like a better path, but you’re contractually obligated, potentially for several more years.

Meanwhile, your business users are continuing the drumbeat for more agility and flexibility — all at lower cost, of course. Adding to the pressure is the fact that your competitors are using cloud to reallocate capital and operating resources to driving innovation and value, placing your company in an untenable — and unsustainable — competitive position. It’s probably also the case that your service provider has no contractual, economic or technical incentives to suggest cloud migration strategies that might improve your position.

Seems you’re stuck. Right?

Maybe not. Just because you’re in a long-term relationship with a service provider does not mean you’re out of options. Most managed services agreements were written without cloud in mind. So, if you’re creative, you might find ways to renegotiate or possibly bring in a new vendor with cloud offerings that fit your business and workloads.

Four steps:

  1. Review the contract. Make sure you know your contract before booking meetings with your service provider or a cloud vendor. Pay particular attention to the process for negotiating changes to the agreement, as well as minimum volume commitments and what happens if your workloads exceed those minimums. Your contract is probably silent on how new workloads are to be serviced, but check that as well.
  2. Focus on work volume, not dollars. Most master services agreements are built around units of work performed in each time period rather than a dollar volume commitment. And once minimum volumes are met, most agreements allow customers to take additional volumes to other vendors and platforms.
  3. Look for a high-value test case. Identify a basket of workloads that are well-suited to cloud migration. Public cloud examples might include dev/test or backup and archival. Private cloud examples might include high-volume transaction workloads running on legacy systems that can be forklifted to a virtualized environment. Use this list of workloads when engaging your service provider and/or cloud vendor. It will focus the conversations on specific, immediate paths forward and help you build financial and technical cases to support your eventual decision.
  4. Amend, if it makes sense. It might not. The reality is that your current service provider likely is not technically equipped to deliver cost-effective, reliable cloud services. If that’s the case, they’ll do everything they can to discourage you from going down that path. Thus, the reality may be that in order to preserve your competitive position, you simply can’t wait for your current provider to figure it out. If that’s the case, you’ll want to move new workloads and cycles beyond your contractual minimums to a provider with the right cloud credentials.

A win/win?

Let’s assume your current provider is up to the task. Here’s where to look for the win/win:

Successfully migrating a set of workloads delivers value to you (increased agility, reduced costs, more productive employees), and also to your service provider (new capabilities and infrastructure roadmaps that they can sell to other customers). With a mutual win for both parties, the stage is set to work with your service provider to forge a contract amendment that makes the next workload migration more procedural. Sweeteners for a deal might include shared cost savings, bonuses for hitting KPI metrics, or a contract extension.

Of course, all of this assumes they can deliver the goods, and that’s probably a long shot.

This time it’s different

Start planning now for your next rebid. Cloud has so fundamentally changed the procurement landscape for managed IT services that your procurement process must fundamentally change as well. Map out your RFI/RFP game plan to:

a) attract service providers who “get” cloud

b) build a next-generation set of performance metrics and incentives into the contract, and

c) account for new elements of value that only cloud providers can offer.

In the next generation IT outsourcing world, service providers are going to look very different from what you find in today’s marketplace. There will be more of them, their capabilities will be different, and the value propositions they offer will need to be accounted for in how you evaluate your choices. Management and governance will follow new models, and metrics will be fundamentally different.

Today, the market is unsettled, and until that changes, the ball will be in your court to procure IT outsourcing agreements that put your company in the best position to reap the competitive benefits of cloud strategies.

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