Renegotiate vendor contracts now to save IT jobs

By Don Tennant, Computerworld |  IT Management, contracts

When I suggested several weeks ago that companies need to force their IT vendors to shoulder more of the burden of the recession and that renegotiating contracts is a better way to cut costs than laying off IT workers, some readers felt I was being unfair. They pointed out that if less favorable contracts force a vendor to lay off employees, those layoffs are just as troubling as layoffs at a user company.

As I wrote in a subsequent column, I fully agree that layoffs are disturbing regardless of who makes them. But what needs to be considered is that while all layoffs are equally troubling, not all layoffs are equally justifiable.

In the column that some readers deemed unfair, I wrote about Dale Frantz, CIO at Auto Warehousing Co., who has managed to avoid laying off a single IT worker even though his company's fortunes are tied to those of the tanking auto industry. I noted that he's facing some tough challenges and that he has managed to cut costs by taking measures such as renegotiating and canceling some vendor contracts. For Frantz, layoffs are an absolute last resort.

And he has little patience for the notion that he and his vendors are on an equal footing when it comes to layoffs. His passion about the topic is hardly veiled.

"Let's be clear: No IT layoff is good, at a vendor or a customer," Frantz wrote in a follow-up email. But, he said, all of the vendors he has negotiated with are profitable, and most are very profitable. "Layoffs at the vendors are occurring not due to necessity to stay in business, but because they treat their IT talent like a commodity," he wrote. "These are not necessary layoffs, but optional ones to keep Wall Street analysts happy."

Auto Warehousing is facing tough economic times, Frantz wrote, "yet we value our IT talent above our vendor contracts and so far we have kept our staff intact. It is not my goal to see our vendors lose money and be forced to lay off staff, but many large companies seem to be taking advantage of the current recession as a means to trim the payroll when it's not absolutely necessary. They are still very profitable."

Frantz wrote all that before word surfaced on March 26 that IBM was laying off another 4,000 (some reports said 5,000) employees. That news, he subsequently added, underscored his point. Quoting from IBM's January shareholders report, Frantz noted that CEO Sam Palmisano spoke of IBM's "outstanding" year in 2008, its "strong financial position," its "solid recurring revenue and profit streams," and its expectation that 2009 will see full-year earnings of at least $9.20 per share.

"Does this sound like they have a desperate need to move 4,000 jobs to India?" Frantz asked.

It's just one example, but the point that your large vendors are probably a lot more profitable than you are, and are likely making a lot more discretionary staff cuts than you are, is a solid one. Perhaps, then, contract renegotiations need not be accompanied by a guilt trip.

According to Diana McKenzie, a Chicago attorney who specializes in IT contract law, companies that are renegotiating are "really, really smart."

"We're getting provisions in contracts that two years ago I would have told the client, 'You're never going to get that; don't even bother asking,' " she said in a March 23 interview. "I'm seeing contracts that historically would have taken three months to negotiate being sent to the vendor and signed the next day." She said her clients "are being delighted" by the prices and terms they're getting in renegotiated contracts.

"Those terms aren't going to be available forever," McKenzie added. "The companies that are smart and are renegotiating now are getting some tremendous deals."

That message can't be spread quickly or widely enough. One layoff made when other options are available is one layoff too many.

Don Tennant is Computerworld's senior editor-at-large. You can contact him at don_tennantcomputerworld.com, visit his blog at http://blogs.computerworld.com/tennant and follow him on Twitter @dontennant.

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