Prepare for renegotiations in 2014
As the tradition of making New Year’s resolutions testifies, the passing of a year often inspires the need for change. However, in 2014, there is set to be more change than ever before, as our research shows that the number of outsourcing contract expirations and renegotiations will reach new heights.
Our Momentum research has found that a total of 1,316 active commercial contracts, collectively valued at $114 billion, will expire next year. The value of expiring contracts is up four per cent from 2013 (also a record year) and marks an increase of 19 per cent from 2012, indicating an accelerating trend.
Delving a little deeper into these expiring contracts, 47 per cent of their total contract value (TCV) is in the EMEA region, while 40 per cent and 13 per cent are in the Americas and Asia Pacific regions, respectively. We can gauge from this that the markets with the greatest value of contracts up for renegotiation tend to be more mature, and prefer more agile, best-of-breed multi-sourcing models.
Information technology outsourcing (ITO) contracts account for about three-quarters of the expiring contract TCV and nearly two-thirds of expiring contract volume. The service lines with the greatest number of expected expirations include infrastructure-only (399 contracts), ADM-only (288) and full-ITO (150) engagements.
We have observed three important factors that are driving the surge in expiring contracts:
- An increased number of contracts with shorter timeframes
- A rise in the number of clients who are interested in renegotiating their outsourcing contracts midway through the term in order to achieve immediate cost savings
- More clients willing to take scope from an incumbent provider and award it to best-of-breed providers as a result of the more mature governance processes that are coming to the fore
This indicates a significant upheaval for incumbent providers, who will need to work hard to retain their business and be willing to play ball in a transformed playing field. Organisations’ focus on efficiency, strong governance and value for money is not going to decrease this year; neither will their expectations for providers to integrate and co-operate within a flexible, multi-sourced environment.
As such, incumbent providers will have to enter these contract renegotiations with a degree of flexibility, understanding what they can and will be prepared to accede, and where their boundaries are. We always recommend that both sides remember that it is a renegotiation, not a war!
Of course, most clients who believe they are receiving quality service at a fair price will renew their agreements with their incumbent service providers. However, as their governance and service integration processes continue to mature, clients are more willing to consider other service providers if they feel they are paying too much or are unhappy with their provider. It is clear that the competition for wallet share is heating up, and I can guess what many incumbent providers will be resolving to change this year…
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