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How to close your next IT outsourcing deal: Handshake vs. contract

Stephanie Overby | May 6, 2013
Should you trade your clear-cut written outsourcing contract for a simpler agreement and a handshake with your IT services provider? Thomas Young from Information Services Group (ISG) says you should consider what he calls 'evolutionary contracting.'

The bigger these contracts are, the less they are understood. And there's lots of interest on the part of advisors and lawyers to make it more complex. But clients don't want to do that over and over again. Ten years ago, we had total contract values worth $15 billion so a consulting fee of $40 million was irrelevant. As deals shrink, which they have quarter over quarter, the economics of hiring consultants and lawyers doesn't work. We need to simplify that.

What the biggest resistance from customers to this?

Young: I spend a lot of time with financial services customers, and they have a lot of rules. It's hard to get procurement and legal types to adopt this. What I suggest is that it's not either or--it's and. We can try this as an experiment in one or two areas, put business controls in place, have an arrangement that's more informal, and see how it goes.

Providers have built up mature processes around the established method of contracting for IT services. Will they want to change that?

Young: Some will and some won't. It's the nature of anything new. We don't have this all figured out. Those that are interested are excited because this creates a stickier relationship. As you pivot from rate card deals into selling outcomes, they can make a lot better margins--if they do it right.

It's hardest for me to get my partners here in consulting to change. They have gotten comfortable with the way things work. It's human nature.

Could customers just put in place simpler deals that are shorter in duration?

Young: You can do simple and short, but you won't get results if you're in a mode where you constantly churn providers. It will work if you do simpler and shorter deals with the same player--a chain link series of deals.

Are there situations in which this kind of evolutionary contract is a bad idea?

Young: If you're in a situation where you have a well-defined environment and you're just trying to optimize it, a classic RFP approach is called for. Think of payments processing in a bank. That's not likely to change radically in the next five years.

What do your competitors say about this approach? Do they think you're crazy or is this something they're already trying to employ?

Young: Probably half and half. If I had to say, I'm probably two standard deviations ahead of the curve. In part, I'm saying this to be provocative to get people to start thinking about new things. I don't know what's going to happen, but I want to drive a consensus approach. I've gotten a lot of positive feedback intellectually. But the hard part is to put it into practice.

 

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