In-Depth

Outsourcers Push for Greater Flexibility

Outsourcers are increasingly trying to achieve greater contract flexibility and minimize overall risk. Here are the risks you should know about.

• By Stephen Swoyer
• 04/01/2008

Ambitious outsourcers are pondering much more than just cost-cutting. According to market watcher International Data Corp. (IDC), companies are typically contracting -- or trying to contract -- with outsourcing service providers to give themselves more flexibility. In this respect, IDC says, they're employing strategies such as "price benchmarking," "claw-back," and "blue-sky" clauses.

The idea, IDC researchers say, is that such strategies give prospective outsourcers more contract flexibility and help them minimize their own overall risk.

That's the upshot of IDC's latest outsourcing survey, The Mind of the Outsourcing Customer: IDC's Annual Outsourcing Survey, 2007.

The tactic isn't without consequences, however. "[C]ustomers need to bear in mind that short-term selective outsourcing contracts with blue-sky clauses may provide flexibility within the scope of services, but will not be very price-competitive when compared to traditional outsourcing contracts," said Aprajita Sharma, IDC's research manager for outsourcing and BPO. Though more-ambitious outsourcers are trying to give themselves more leverage, especially when it comes to contract renegotiation, traditional outsourcing arrangements still predominate.

Multi-sourcing is another increasingly popular strategy, although its growth hasn't had much impact on traditional outsourcing giants such as IBM Global Services, Electronic Data Systems (EDS), or Computer Sciences Corp. (CSC).

"Despite the prevalence of this multi-sourcing trend, the traditional outsourcing suppliers like IBM, EDS, CSC ended up signing longer-term, highly bundled multi-tower contracts in 2007," Sharma points out. "IBM managed a sweeping victory over its competitors when it came to ranking customer perception of being a leading outsourcing player. IBM has reinforced this with some high-profile strategic deals signed with National Australia Bank, Commonwealth Bank, and others within the government segment," she added.

Elsewhere, IDC says, security issues -- especially increasing concern about exposing sensitive internal processes -- are becoming more important to organizations. Prospective outsourcers also seem to have learned from past mistakes. Many now cite "solid communication" as extremely important in any outsourcing relationship.

What are outsourcers outsourcing? Overall, IDC says, the results indicate a high level of activity within the applications maintenance/management and development space in larger organizations.