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14 Aug 2008
The power balance in outsourcing contracts is changing, according to a new report by Pierre Audoin Consultants (PAC). The report argues that contracts are geared increasingly towards customers rather than providers.
"Contracts are being given more insulation with tougher service level agreements and break-out clauses," said Dominic Trott, PAC consultant.
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The recent examples of TFL giving notice to TranSys on the London Underground Oyster card contract and the announcement by Barclays that it will not renew its deal with Siemens both show customers’ increased bargaining power, said Trott.
Trott said the shift by businesses towards multi-sourcing strategies was partly responsible for the new shape of contracts. Customers will be able to play different providers off each other, driving the cost of outsourcing services down and increasing contract flexibility, he said.
But Duncan Aitchison from outsourcing advisory firm TPI disagreed there has been a power shift in outsourcing contracts.
Instead, Aitchison said the new bargaining power used by customers is just a reflection of the outsourcing market maturing. Buyers are more informed and can construct better agreements that include more sophisticated exit provisions such as partial termination, he said.
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Power balance changing for the better
This is a timely article and makes for interesting reading. As an outsourcing provider of managed services, I can confirm that the power balance is indeed changing, but for the better. For too long the balance of power has resided with the larger outsourcing companies to the point where they can dictate the terms of the contract: how long it will be, what equipment will be provided, and what SLA will be offered. With the maturing of the market and the empowerment of the customer, independent providers have emerged capable of negotiating contracts which the customer to achieve an outsourcing agreement which aligns their IT with their business goals. The growth in competition has seen the market become more cost competitive too, opening itself up to smaller companies, for which outsourcing may have not have been available. As a managed service provider in the data centre space, Adapt's customers have demanded not only better prices, but an additional full suite of managed and consulting services from us, and we have responded. These sorts of customer demands and tougher negotiations ultimately improve the quality of the provider's offering and as such are to the long term benefit of the provider. As an outsourcing provider, I welcome this news. Peter Knight, CEO Adapt PLC.
Posted by: Peter Knight, CEO Adapt PLC 15 Aug 2008