CIOs warned against long outsourcing contracts

Ten years? Tell him he's dreaming.

Gartner has advised CIOs against signing outsourcing deals with base terms of longer than five years.

Mike Lafford, group vice president at Gartner told an audience of CIOs in Sydney that today's best practice is a base term three to five year deal, with extension clauses of one to two years.

"Please, please, please, don't sign ten year deals," Lafford urged attendees. "I can't believe I still see people doing this."

Many large Australian private sector organisations and Federal Government agencies have - particularly in the late 1990s - signed outsourcing deals for periods of up to ten years - including the Australian Tax Office, the South Australian Government, the Commonwealth Bank, Qantas and Westpac.

Many are again considering ten year deals as the current ones expire.

"[Outsourcing] vendors will offer these deals, looking for continuity of revenue," Lafford said. "They will give you very exciting advantages around price and terms and conditions.

"But without the right performance management constructs in place... the arguments for shorter deals are far more compelling," he said.

"Please, please, please, don't sign ten year deals."
- Mike Lafford, Gartner

Lafford said most organisations were attracted to offers of reduced prices in return for signing ten year deals.

Indeed, in the Federal Government's latest procurement guidelines, released yesterday, agencies were told that the public interest was best served "when government agencies achieve value for money for their purchasing activities."

Lafford said another major driver of long-term deals was the perceived "cost of transition" and long periods of evaluation that comes with negotiating an outsourcing agreement.

"The contract process in Government is notoriously protracted and complicated," Lafford said.

"When I was meeting with CIOs in Canberra last week, they were telling me that they weren't going to go through all of that for a two or three year contract. My argument to them is that the real problem is the contracting process."

Problems with long deals

Lafford outlined a few of the major problems with long term outsourcing agreements.

One is the pace of technology change.

"Does anybody in this room have a ten year deal on their mobile phone?" Lafford asked, to illustrate.

Second, business requirements change.

The recent economic downturn, for example, may have reduced the baseline of IT services required for many customers. But under inflexible long-term outsourcing agreements, they may still be paying, for example, for an outsourcer to support desktops that are no longer in use due to downsizing of staff.

Similarly, Gartner analyst Jim Longwood said many Australian resources companies signed up for a level of services that didn't anticipate the mining boom that followed, and found themselves paying too much for the additional services required during the term of the contract.

What happens when your outsourcing partner runs into financial hardship or goes bust? Read on to page 2 for more.