Time to renegotiate those 'mega' IT deals?

• Author: Haas, Bob
• Position: Technology

A typical large company deals with dozens of information technology suppliers for hardware, software and the supporting services vital to day-to-day operations. In fact, industries that rely on IT--from financial services and telecommunications to retail--may contend with literally hundreds of IT vendors and services.

To manage the complexity and vastness of these arrangements, many companies partner with one or two primary IT outsourcers in "mega deals." These are the deals that cost more than $50 million a year, and where the outsourcer coordinates almost all services.

For companies that have mega deals already in place, now is a good time to consider restructuring them. As the global economy slows down, and financial executives have undoubtedly moved to trim costs and improve efficiency, the IT mega deal is ripe for renegotiation.

Changing Needs and Costs

Depending on the industry, IT can comprise between 25 percent to 50 percent of all indirect spending. Costs to deliver like-for-like IT capabilities have fallen 3 percent to 5 percent annually over the past decade due to increasing automation and greater standardization of technologies. A mega deal that was created just 24 months ago may no longer be aligned with today's reality. An agreement struck in the context of growth and expansion may not be positioned to control costs.

Constant changes in the business environment make it inevitable that various problems and service gaps crop up over time. Indeed, 80 percent of outsourcing deals are restructured at some point, and 15 percent are renegotiated within the first year.

According to Computerwire's IT Services Contracts Database, 69 mega deals were renegotiated last year, accounting for a total of $19 billion in IT deals. Restructuring can address all aspects of an agreement, including pricing model, volumes, service levels and delivery architecture. In all, clients can potentially save 12 percent to 25 percent, depending on the age of the old deal and the length of the new one.

Indeed, many outsourcing deals contain provisions for renegotiating the contract after a certain period of time. From a legal standpoint, the agreements contain provisions, either based on benchmarks or environmental changes, which provide the flexibility to reconvene talks. Both parties can also mutually agree to amend their contracts at any time. Even if renegotiation is not explicitly stated in contracts, outsourcers are frequently open to discussions...