If there was one outsourcing theme in 2001, it was a shift in focus from adding value to saving money, reports Paul Roy, a partner at Mayer Brown & Platt, an international law firm based in Chicago, Illinois. “There was a renewed interest in outsourcing deals, but only if they can provide immediate cost savings,” says Roy, who is the coordinator of the firm’s IT practice.
In the past, companies outsourced to improve their access to new technology, gain flexibility and integrate functions. Saving money was always on the wish list, but often close to the bottom, Roy reports. In 2001, cost savings hit “the top of the list. Sometimes it was the only reason,” Roy says.
Another development has been the downfall of the new economy trend of using IT as a marketing tool. For example, many companies that created exchanges as a strategic focus are now in serious financial trouble, he points out.
A Wave of Renegotiations
Roy has seen a “wave of renegotiations.” Companies trying to reduce cost are renegotiating their current outsourcing deals to achieve their new goals, now that they find themselves in changed circumstances. This trend is causing suppliers “to share in the pain of down sizing,” adds Roy, as buyers dramatically reduce their head counts.
Buyers are also giving the termination provisions of their existing contracts “careful scrutiny,” he says. “Many companies put their contracts in their top drawers, hoping to never look at them again. Now they are pouring over their termination rights.”
Roy predicts this renegotiation trend will continue this year.
Fortunately, he also predicts the outsourcing market will continue to grow, too, “as long as the supplier can show immediate financial benefits.” Cost savings will remain a key focus in 2002.On the horizon in 2003, Roy believes the integration of data and voice into one network will become the big growth area “because it offers big cost savings.” Historically, companies achieved cost savings in the telecommunications area by winning a reduction in rates from their carriers. Managed networks that can provide both email and voice mail will produce new savings for the customer.
Lessons from the Outsourcing Journal:
- Cost savings is the No. 1 reason to outsource IT. Sometimes it is the only reason.
- Buyers in changed circumstances are renegotiating their contracts to try to gain greater savings from their suppliers.
- Buyers are studying their exit provisions closely. Before they kept their contracts in their top drawers, hoping to never look at them again.
- Outsourcing will grow in 2002 as long as suppliers can demonstrate the new contracts will save money.