Outsourcing deals a sore point for firms

Though some companies are dissatisfied with their IT outsourcing agreements, it's typically too costly and cumbersome to switch to a new provider, according to new research.

Kim Girard
Kim Girard
Kim Girard has written about business and technology for more than a decade, as an editor at CNET News.com, senior writer at Business 2.0 magazine and online writer at Red Herring. As a freelancer, she's written for publications including Fast Company, CIO and Berkeley's Haas School of Business. She also assisted Business Week's Peter Burrows with his 2003 book Backfire, which covered the travails of controversial Hewlett-Packard CEO Carly Fiorina. An avid cook, she's blogged about the joy of cheap wine and thinks about food most days in ways some find obsessive.
2 min read
Though some companies are dissatisfied with their IT outsourcing agreements, it's typically too costly and cumbersome to switch to a new provider, according to new research.

Only 20 percent of the corporations surveyed over the past six months by Input Research, a Vienna, Virginia-based consultancy, said they have considered not renewing agreements with their outsource provider when contracts expire.

Many companies said that their outsource provider is not responsive enough, or the contract does not provide any added business value. Also, some firms said that their deals aren't flexible enough to handle company growth or market price fluctuations.

Input senior analyst Albert Nekimken said it's difficult to gauge how many companies actually do renew a contract, change vendors, or bring the IT work back in-house when a deal ends. That's mostly because outsourcers aren't very forthcoming about disclosing their true contract renewal rates, he said.

"Vendors say they have a 90-percent renewal rate," Nekimken said. "They may think that or want that, but I don't think that's the reality."

Several analysts agreed that outsourcing contracts are probably renewed about 70 percent of the time, though contract lengths have become shorter over the past several years, partly driven by an ever-changing technology cycle.

Because of those changes, an increasing number of contracts are now renegotiated before the end of an agreed upon term, said Anne Gilroy, a spokeswoman at the Outsourcing Institute, a New York-based industry group.

"The seven-year contract isn't even discussed anymore," said Dean Davison, head of IT outsourcing research at Meta Group. "Five years is infinite."

Davison speculated that many companies are renewing not because they are pleased with the work, but because they've already invested too much in outsourcing and it would be prohibitively expensive to return to managing their own computer systems.

Customers are "frustrated to death with vendors who can't deliver on a promise," Davison said, though noting that these same clients do need to learn to draft better contracts and not accept vague terms in the place of concrete service levels, response times, availability, and pricing.

Failing to provide specific information is "one of the major failures" in the industry, he said.

Another problem arises when companies figure out that their agreements aren't meeting their business needs, according to Howard Lackow, a managing director at Transition Partners, a company that works with outsourcers.

While Lackow estimated that most firms do renew contracts with their existing outsourcing partner, he said he finds that too many companies depend on technical managers, rather than internal business experts, to negotiate contract service levels--which can often lead to poor business performance.

For example, a health care company Lackow worked with decided it wanted to measure how long a computer system took to return information to a call center operator.

What was really important, the company later discovered, "wasn't the response time but the quality and accuracy of the information the person was getting," he said.