One effect of the recession has been the number of outsourcing deals signed in haste to reduce an organisation’s costs. A recent report by the London School of Economics suggests that many of these deals will be terminated shortly on the grounds that they are not appropriate for business as the economy improves.

Coupled with the fact that many older outsourcing deals will come up for renewal or rebidding then now could be a good time to review your approach and your contract terms.

LV=, the UK financial services compay, has extended its IT services contract with Atos Origin by four years.

Atos provide midrange and mainframe hosting services. The original contract was signed in 2008.

Following the reduction in outsourcing prices in 2009, analysts are predicting further falls in 2010. The price drops are not just the effect of the recession, other factors include price pressure from customers, increased use of offshore services, and de-scoping of outsource vendor services.

One school of thought suggests that if the economy begins to grow again some outsourcers will try to recoup some of the concessions they have had to make. This, however, is unlikely given increased competition from offshore.

In an effort to reduce carbon emmissions the UK government is introducing the Carbon Reduction Commitment (CRC) in April 2010. This legislation applies to all UK companies consuming over 6,000 megawatt hours of electricity per year.

Whilst this legislation is a laudable effort to reduce the UK’s carbon emissions, it could have the unfortunate effect of disadvantaging the UK outsourcing industry and favouring offshore outsourcing operations.

An important change to VAT rules could potentially increase offshore service costs for EU businesses from 1st January 2010.

Under current VAT rules the basic place of supply rule for VAT purposes is the country where the supplier is based. This means that offshore suppliers outside of the EU charged no VAT - giving them a substantial commercial advantage.

From 1 January 2010 business customers will have to account for the reverse charge to VAT on the costs of these services.

A recent study by the University of Warwick (sponsored by Cognizant) reveals that only 8% of businesses know how much is spent on their outsourcing contracts.

The sample is based on interviews with 263 companies across Europe with turnovers between £300m and £600m.

Only 39% believe the financial contribution of outsourcing can be assesssed at all

Over 50% did not measure the financial and other benefits originating from their outsourcing contracts.

In the early days of outsourcing, businesses looked for IT service providers to reduce costs. Cost-reduction came from areas such as shared service models, shared operations infrastructure (firewalls, switches, disaster recovery sites), and elimination of IT staff management issues (absence, overtime payments). There was a tacit understanding that services would be delivered to the same standard as those provided in-house.
 

Smarter IT Outsourcing Contracts

Some ideas for getting the most from your IT outsourcing contract.