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Advice to outsourcers: It's good to talk

Poor communication between IT outsourcing companies and their customers can lead to a shock when it comes time to renew contracts, according to analysts.

Just because a company renews its contract with an information technology outsourcing vendor doesn't mean that all is well--the details often tell a different story, said a consultant.

Wissam Raffoul, a senior program director with Meta Group, said that the IT analysis company's research has shown that while 70 percent of outsourcing contracts are renewed, many are saddled with new limits on scope and duration.

That indicates problems in the customer-vendor relationship that could have been fixed while the previous contract was still in force, but weren't, he said at a Meta Group seminar in Singapore last week. Outsourcing is the practice of one company hiring another one to run an aspect of its business, such as maintaining its PC or managing a data center.

"The customers want to avoid the pain of creating a relationship with a new vendor. It's better the devil they know than the devil they don't," said Raffoul.

Raffoul's comments reflect the current state of turbulence in outsourcing. Market research firm Gartner Dataquest has cautioned that in 2003, half of IT outsourcing projects will fail because they have not delivered the expected value. Poor communication between client and vendor, the lack of a plan to manage the relationship between these and the constant change in business plans and technology are cited as the main causes of customer dissatisfaction, said Gartner.

There are other signs of how bad the communications breakdown can get, according to Raffoul. Another Meta Group survey showed that if IT managers could have changed one thing in their outsourcing contracts, it would have been the exit clause, to make it less restrictive.

Many companies underestimate how rocky communications can become, and don't invest enough in managing the relationship, he said. Too often, customer unhappiness is only felt at contract renewal time, when it comes as a shock to the vendor, he said.

Of those companies that stop outsourcing, 20 percent do so because a working relationship with the vendor failed to materialize. Sometimes, the problem is so bad that if there had been a chance to sever the contract earlier, the customer would have, said Raffoul. The remaining 10 percent choose to return the IT function back into the company, because of changing business conditions.

The solution to the communications breakdown? Make vendor management a formal part of the deal and have an "intent" contract in addition to the legal contract. An intent contract captures in broader terms the spirit of the deal in a way a plain legal contact cannot, and can help should things have to go to court, Raffoul said.

Raffoul was speaking at a Meta Group seminar on outsourcing held in Singapore last Thursday. The Meta Group provides consultancy services to companies outsourcing their IT functions.

CNETAsia's John Lui reported from Singapore.