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Three reasons end-of-contract decisions are getting harder

Posted: 06/03/2016 - 19:59

At the end of a contract term, buyers of outsourced services have several options. They can renew the agreement and sign on for more of the same, renegotiate terms, seek a new partner through a re-bid or take services back in-house.

Given the pace of technology change and the ferocity of market competition, these choices are becoming increasing complex. Standing pat and signing on for more of the same ensures falling behind market leaders. An aggressive all-in move to a new technology, meanwhile, could prove to be a disastrously wrong choice.

Let’s look at three factors that are complicating the end-of-contract decision-making process.

First off, the traditional long-term, billion-dollar contract with “one throat to choke” has been replaced by a multisourced environment characterised by smaller contracts and shorter contract terms. Suppliers, meanwhile, have become increasingly varied and specialised. All this makes end-of-contract decisions increasingly complex, if for no other reason than they must be made on an almost ongoing basis. With new agreements to implement and new providers to integrate into the delivery model, enterprises must constantly manage multiple moving parts and evaluate numerous options and alternatives.

New cloud offerings are another game changer, allowing clients to leverage purchasing power, avoid lock-in with one provider and offload day-to-day management responsibility of multiple providers. Most major providers offer a wide range of hybrid, private and public cloud offerings, and brokerage services have matured, enabling clients to use third-party outsourcing providers to procure on-demand public cloud offerings and oversee and manage commercial, operational and technical requirements.

A key question in assessing cloud is whether to work with an incumbent or seek a new provider. The former approach makes sense when the incumbent’s contract allows the customer to take advantage of cloud offerings. Many agreements contain innovation or tech refresh clauses that can provide a window of opportunity to assess possibilities. Other agreements, however, are structured so that the introduction of innovation may reduce resource requirements and negatively impact provider revenues. In such cases incumbents may be reluctant to proactively drive innovation. That said, a decision to move to a new provider should be taken as part of a comprehensive supplier evaluation that is undertaken for any type of service offering. The potential impact of migration and change should not be underestimated, and should be a critical criterion in the decision-making process.

Third, robotic process automation (RPA) can dramatically reduce costs by implementing digital robots to execute routine and repetitive tasks traditionally performed by humans. In addition to cost savings, the enhanced accuracy and auditability of RPA solutions enables significant improvement in areas such as data analytics and regulatory compliance.

From an end-of-contract perspective, RPA raises some thorny issues. For clients, the challenge is choosing among a wide range of RPA providers and myriad delivery models. For service providers, RPA represents a potential threat, as it undermines the traditional model of labour arbitrage and lowers costs and drives down revenue. At the same time, innovative providers who seize the RPA opportunity can win new business and increase margins by leveraging automation capabilities to improve their internal delivery efficiencies.

The end of a traditional IT services agreement can be an ideal opportunity for a client to take advantage of RPA technology. The incumbent provider, however, faces a serious dilemma, since proactively offering an RPA solution risks cannibalising existing revenue, while proposing a renewal of existing services and terms opens the door to aggressive competitors seeking to gain market share through RPA.

To gauge an existing provider’s commitment to innovation, buyers should consider whether their incumbent proactively brings RPA solutions to the table, or whether they do so only when asked. At the same time, clients can be proactive and take steps to create incentives for providers to encourage RPA innovation and compensate for lost revenue. These incentives can include a better margin that maintains profits, or an opportunity to recoup revenue through new gain-sharing initiatives. This approach creates a potential benefit for the client by facilitating engagement and commitment from the provider, as well as mitigating the risk involved in bringing in a new team.

A decision to re-compete services raises complex questions regarding which set of outsourcing providers to engage. Expertise in implementing off-the-shelf software from vendors such as Automation Anywhere, Blue Prism or IPsoft is important. But more options are emerging, as traditional service providers aggressively develop their own automation platforms. Along with IBM’s established Watson initiative, these include Wipro’s Holmes, TCS’ ROBO tools, Syntel’s SyntBots, HCL’s Dry Ice and Infosys’ Mana. The features and capabilities of these solutions vary widely, and each approach has its respective strengths, weaknesses and risks, which clients must consider in the context of their specific requirements.

So how can clients navigate these myriad options and effectively manage the increasingly complex end-of-contract decision-making process?

One key is insight into the existing state of operations at the end of a contract term. An effective and market-aligned baseline is essential to identifying the scope of the improvement opportunity – be it from renegotiating existing terms, bringing in new providers or implementing a new technology. Assessing alternatives and modelling the downstream implications of one choice versus another is also imperative. In this regard, the challenge lies in comparing the apples of existing technology against the oranges of moving to a new technology.

Second, clients need to ensure that – if and when new providers are brought into the mix – effective processes are in place to integrate new providers into the service delivery mix. The transition period is the most critical, as well as the riskiest, phase of an outsourcing relationship. A smooth transition lays the groundwork for a successful partnership, while the consequences of a botched transition can rarely be overcome. As such, transition and change management discipline is a must-have for any enterprise operating in a multi-vendor environment.

Finally, effective decision-making on sourcing options requires insight into provider capabilities, including not only the “usual suspects” of tier one outsourcers, but of niche providers and new entrants specialising in emerging technologies. With industry expertise becoming increasingly important in many sectors, clients must ensure that providers have relevant experience and can demonstrate an understanding of key business issues.

Alsbridge

[EDITOR'S NOTE: In December 2016 Alsbridge was acquired by Information Services Group (ISG). To avoid confusion and for the purposes of historical integrity, Outsource has kept all references to Alsbridge in place, on all content published prior to the date of acquisition.] Alsbridge is a management consulting firm that helps companies improve operations, reduce costs and optimize service provider relationships. With over 300 consultants globally, Alsbridge has worked with over 40% of the Fortune 500 and currently advises over 200 clients a year on over $11b in spend. We apply operational data and market insight to help clients align sourcing strategies to business requirements, negotiate contracts at fair market prices and improve governance and vendor management. Services comprise Sourcing Advisory, Network, Transformation and Cloud, IT Asset Management, Benchmarking, Vendor Management and Governance and Intelligent Process Automation Advisory. Contact us to learn more.

About The Author

Peter Iannone's picture

Peter Iannone is a Managing Director with Alsbridge, a global sourcing advisory and consulting firm.