Long duration contracts are being phased out, but careful negotiation remains crucial for all parties.
With companies agonising over their bottom lines, the downturn should have been a perfect storm of opportunity for outsourcing providers. Not so. Even the biggest suppliers have struggled to close deals in a market where organisations have faced unprecedented levels of uncertainty and liquidity problems.
While companies have wanted to outsource, they have held back, afraid that unexpected changes to budgets will require mid-term alterations to contracts and a raft of expensive renegotiation costs.
Ten, even five, years ago, decade long megadeals were the norm. But companies realise that those contracts, drawn in a different economic era, are now completely out of line with the current market. As many of these deals reach the end of their terms or come up for contractual renegotiation, better-informed buyers are shopping around for a standardised, competitive product that costs less.
Service providers are realising that as the easy pickings run out and shorter output-based deals become dominant, they have to invest more in the so-called ‘relationship concept’ that they have traditionally used to woo clients.
As a consequence, they are being forced to show a greater willingness to absorb risk within deals. This has brought the supplier’s skin into the game. Such dynamism is probably a boon for the market but if service providers are forced to trim their margins and stunt their ability to innovate or offer transformation, the industry as a whole might suffer in the long-run. With this in mind, Richard Hawtin, partner at the legal firm Baker & McKenzie, says that companies will need to be a lot more self-critical if things go wrong in the future.
“Of course suppliers can make mistakes, have to make money, and can over-promise and under-deliver,” says Hawtin. “But before throwing the first stone, a customer needs to ask whether they invested in the right skills to run the deal effectively. Half the time when someone’s unhappy it’s because they are not getting something that the supplier was never contracted to deliver in the first place.”
Given the few contractual protections buyers have against supplier insolvency issues, they may feel less inclined towards magnanimity. The Indian offshoring industry’s one major scandal, involving IT services giant Satyam, has only stirred up misgivings. But it’s important to keep this in context: while the Satyam fraud caused consternation, all of its clients came out unscathed following an intervention by the Indian government.
The scandal has also prompted rival firms like Infosys to open up their accounts to clients and show they have nothing to hide. Industry insiders say that in the long run Satyam’s clients might move elsewhere, but in the short-run the only value to be derived from such a situation is to be patient and wait for the supplier to recover.
“Yes, there is a risk. But customers need to be realistic, not paranoid” says Hawtin. “In a long-term deal it’s far more likely that a customer’s business will go through changes requiring renegotiation, than that a significant supplier will run into difficulties.”
In practice, there will always be some divergence of interests between clients and their outsourcing providers regarding risks and responsibilities. It’s safer to assume that the key to a smooth termination or renewal rests more with an effective, and inevitably costly, process of negotiation.
By Divya Guha
Please Login or Register for free to view to the full article.
|
