Businesses fear outsourcing commitments

Suppliers are offering more flexible deals as businesses shy away from long-term outsourcing contracts.

Experts believe IT services companies are now looking to soften client feelings of being tied in for extended periods.

Perceptions of multi-year contracts have been soured by a combination of overselling and high-profile outsourcing disasters, according to Scott Smith, managing partner at analyst Cumulus Research Partners.

"There was a lot of over-promising going on, which has helped grow the perception that in-house IT departments can do things better," he said.

But Robert Morgan, chief executive of outsourcing consultancy Morgan Chambers, said many short-term deals were for commodity services such as storage on demand or web hosting.

"They're not real outsourcing because they don't take the risk. They're pretending to be an EDS or and IBM Global Services but they're not comparing apples with apples. It's a sales ploy," he said.

Nonetheless, high-end services providers have all been looking at ways to reduce long tie-ins, to address growing customer scepticism.

As a result the length of 'holistic', large-scale IT contracts has come down to five years from the seven-year average of a few years ago, Morgan said.

"I would never advise a contract to be any longer than five years, although if you're doing financial reengineering outsourcing the economics may only work over five to seven years.

"Go for the shortest contract against the objectives for why you're outsourcing - you can always extend it," he advised.

Anthony Miller, principal analyst at Ovum Holway, said increasing business uncertainty and merger and acquisition activity also meant shorter contracts.

"Outsourcing contracts today can't be designed to cover every eventuality but should include a process for consultation if something changes in the relationship," he said.

"Of course it's a commercial deal, but it's also much more about partnerships these days."