In the era of digital disruption, the ability to successfully implement new technologies such as mobility, big data and analytics systems, cloud computing options, or robotics for competitive advantage is critical. In some cases, going to an existing IT service provider may not be the best way to do so. However, in many cases, there are advantages to working with incumbent supplier. Doing so may enable IT outsourcing customers to leverage existing contractual commitments and terms to accelerate the contracting process.
Business and IT leaders may want a trusted partner to manage their entire technology environment. By expanding the scope of an existing deal, the customer can retain integrated performance standards and service levels for the entire environment and maintain streamlined governance processes. It also may be a way to minimize any transition or termination costs.
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The challenges of integrating disruptive tech into an existing contract
However, the integration of disruptive technologies into an existing sourcing arrangement can present a number of new challenges, says Linda Rhodes, partner in the Washington, D.C. office of law firm Mayer Brown. “The contractual rights and protections available to the client in important areas — such as control rights, approval rights, audit rights, intellectual property ownership rights and post-termination rights—are likely to be different in many respects,” Rhodes says.
“The pricing models used for disruptive technologies, such as cloud, everything-as-a-service and autonomics or robotics, are also likely to be very different.” What’s more, the existing IT service provider may have to rely on a subcontractor to deliver some of these capabilities.
In addition, there are potential issues common to expanding the scope of any IT outsourcing contract. There may be transition charges to consider. “Moving to a new technology solution will require transition work, including designing the new solution, developing a detailed transition plan, determining the road map for the migration, and migrating to the new technology,” Rhodes says. “Implementing new tools, including reporting tools and processes, may also be necessary.” Customers must build such additional costs into their business cases.
Moving to a new technology solution could result in the termination of all or part of the existing agreement for convenience or trigger minimum commitments, resulting in continued payment of minimum charges or termination charges. “Working in the context of your existing contract, you may have leverage to negotiate around certain termination charges,” says Daniel Masur, Partner-in-Charge of Mayer Brown’s Washington, D.C. office and a leader of its business and technology sourcing practice. “But certain termination charges, such as stranded costs, may not be negotiable.”
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Stranded costs can include equipment that becomes irrelevant. “If the client owns or leases the equipment, it is likely to have equipment that is not at end-of-term or end-of-life at the time of migration to the new solution,” Masur says. “If the provider owns the equipment, then the provider will have stranded costs and want to pass those costs onto the client through termination charges.”
Similarly, there may be third-party maintenance contracts that will have to be ended with their own associated termination fees. In addition, the outsourcing client may have leased space that is no longer needed with the new technology solution. That, too, must be factored into business cases and planning.
Steps IT outsourcing customers can take to integrate disruptive tech
First and foremost, clients should define the optimum process from the beginning. “Do not feel constrained to link the negotiations with contract renewal,” Masur says. “Instead, be driven by the objectives and requirements of the business.” Companies should also define the role of the incumbent outsourcing provider in this process.
Secondly, companies should perform a detailed cost-benefit analysis. This evaluation “may be more complicated than the cost-benefit analysis associated with traditional transactions,” says Masur. “Often, the impetus for the new technology solution is more than just cost savings. The anticipated benefits may include improvement in time to deploy, end-user productivity, speed to market, cost of inventory, marketing effectiveness, customer renewal rates, and so on.”
Third, outsourcing customers should not underestimate the change management challenges and considerations. The company’s employees must be willing and able to adopt these new technologies and processes in order to extract their intended value. “Be honest regarding your organization’s willingness to embrace change, relinquish control, accept a vanilla one-to-many solution and forego customization,” Masur advises.
Finally, clients should create and maintain negotiating leverage throughout the process. To that end, “it is important to create deadlines and a sense of urgency and to maintain the specter of competition,” Masur says. “Be sure you understand what the supplier wants out of the process and build that into your strategy.”
This story, "How to integrate disruptive technologies into IT outsourcing contracts" was originally published by CIO.