In a recent article in online magazine IT News, government CIOs are actively warned against signing long term service deals. Mike Lafford, from Gartner, advises government CIOs against long term contracts.
“Please, please, please, don’t sign ten year deals.“
– Mike Lafford, Gartner
Logic favours a longer contract in order to squeeze more value for money from a vendor by allowing them greater economies of scale (i.e. more guaranteed revenue = more borrowing power = bigger, better service infrastructure). However, Mr Lafford notes that the contracting process is so long and tedious that vendors artificially force up their margins to cover the enormous costs of business development and tendering. Government departments, therefore in particular, do not see cost benefits.
– Current outsourcing contracts show a level of sharp practice and degree of innovation usually reserved for used car sales –
Lafford, however, does concede that there are 3 artificial factors which increase both the risk and costs for vendors, namely:
- Transition Costs are High – Departments are told they place an unusually high management burden on vendors by ‘creeping’ into contracts. Long evaluation periods and bespoke management structures all serve to drive up vendor costs. Purchasors should align their management structures with the, relatively, inflexible service delivery of the vendors. In addition they can give the vendor a 3-6 month Service Credit holiday with a Buy-Back/Call Option at the en. In this situation all current infrastructure remains in place and the Buy-Back option (purchase for the base cost of transition) is contingent on a stipulated average service performance level well below market benchmarks.
- Vendor Risk in Technology/Business Change – Primary risk is derived from reduced volume/numbers, e.g. in desktop support. There are 2 possible ways to deal with this: (i) sign a deal involving multiple departments. Hedge overflow costs buy buying and selling capacity amongst departments/teams. Secondly, (ii) pay for the minimum not the maximum and then buy overflow capacity. Departments and teams are always looking at headcount reduction so don’t buy at your maximum capacity but do expect/ensure good discounts (on an increasing scale) for more capacity.
- Inflexibility in Contracts – The current thesis is that long contracts are inflexible contracts. This is nonsense, although technology contracts can be far more complex than PPP contracts, for instance, for the reasons stated above, i.e. lack of clarity in the future requirements. The focus of most contracts is on the ‘operational clauses’, i.e. boilerplate governing standard business relationships. Failure of outsourcing contracts, however, is almost always with the failure of contract management (by which we usually mean “service management”). In order to develop a contract which changes over time, the focus of the contract must be in the Service Management Schedules.
In summ, governments and businesses alike have to realise that someone pays for risk. If they place risk with the vendor then the business/department ultimately buys it back. To that end, I would usually recommend a 5+5 contract. The trick, however, is not with the development of the KPIs but rather with the management of the service. To that end, Purchasors should not underestimate the detail they need to go in to when developing their service management structure.