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Another Trend In Outsourcing

May 20, 2008

Anyone can tell you that outsourcing contracts are complex. They are also typically very long. And if the press is to be believed, frequently not very effective.

I have observed two interesting – and apparently contradictory – trends in recent months. One is the fact that customers are increasingly developing their skills and capabilities in both negotiating and managing outsourced relationships to adopt a less confrontational and legally-driven style. And at the same time, within the supplier community, the grip of the lawyers is increasing.

So what is going on?

On the buy side, led by some of the top advisory firms such as TPI. Alsbridge and Equaterra, there is growing understanding that confrontation and risk allocation lead suppliers to a culture of margin recovery and blame. To succeed, outsourced relationships must be built on a collaborative foundation and this requires a much more holistic approach to negotiation and post-award governance.

But on the supply-side, there has been a noticeable tightening of control, with the erosion of many business-minded contracts and commercial groups. For example, at both IBM Corporation and Siemens Business Services the contracts and negotiations staff have recently been absorbed into Legal, with substantial job losses. EDS has never shifted from its legally-dominated approach and, while the trends at Accenture remain unclear, they have also typically had Legal lead the negotiation.

My speculation is that this trend is a reaction to the push for ‘commoditization’ of outsourced services. With margins under pressure, we may see growing risk aversion and increased tightening of contract terms. Most suppliers may become even tougher in their post-award change management procedures, seeking to maintain and increase margins throughout the relationship lifecycle.

It promises to be a painful period of adjustment. And it will be interesting to see what contracting model emerges from the new HP / EDS consolidation. Given the importance of contracting in both winning and executing deals, the newly amalgamated group has an opportunity to put some clear blue water between its approach and that of its competitors. Whether it will spot the opportunity, only time will tell ….

One Comment
  1. This is really interesting. Customers apparently signalling that they want a more values based relationship but the signs from suppliers are that they are heading in a opposite direction and tightening the legal basis of their contractual relationship. As with my last comment it is all about different thinking. If outsource suppliers continue to put their legal departments in the lead of contract negotiation with customers the outcome is a foregone conclusion. If the thinking does not change then even if HP/EDS spot the opportunity they will fail to exploit it. Customers are not yet in my view exhibiting sufficient different thinking to influence this outcome. My betting is that they will fail and that dissatisfaction, enormous waste and lost opportunity will continue to haunt the world of outsourcing.

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