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The Consolidation of Vendor Relationships

Although he sees few mega-deals on the outsourcing horizon for 1999, Robert E. Zahler, a partner in the law firm of Shaw, Pittman, Potts and Trowbridge, does predict a streamlining of outsourcing relationships.

“For a number of years now, advisers, the press and some consultants have been recommending that companies consider dividing up their outsourcing among multiple vendors,” says Zahler. “I believe that we will see more centralization or concentration. Companies will tend to consolidate outsourcing relationships among a smaller number of companies — maybe a single company — and try to achieve a better relationship with the outsourcing vendors or vendor who is supplying them services.”

That move may be driven by the current state of relationships between customers and vendors, which Zahler says has not been particularly good and continues to worsen.

“I think vendors are trying to deflect some of their poor performance or their inability to perform by saying that the processes that are used to get into outsourcing relationships are too burdensome, too expensive, too time-consuming,” he says. “But the reality is where people have thought of it as a quickie-type outsourcing relationship, they are having lots of problems.”

As an example, he points to the Y2K issue. While most well-drafted outsourcing contracts impose significant responsibility and liability on the outsourcing vendor for major portions of Y2K compliance, particularly in the systems software and operations area, he says, most outsourcing contracts entered into before 1996 or 1997 did not contain any explicit reference about the responsibility for Y2K compliance. That has created a situation where suppliers are generally taking the view that the customer is responsible for Y2K compliance for the system software and testing activity.

“In general, we do not believe the contracts support that view,” says Zahler. “And regardless of who has economic responsibility, it is clear that the outsourcing vendors are the people that need to do this work. A number of them, for some very large clients, are falling behind in their ability to actually complete the Y2K work for these entities — and that will tend to cause a deterioration in the relationships between the suppliers and customers.”

Y2K versus the Economy

He believes Y2K will be a ‘dampening factor’ for growth in 1999. “I think there generally will be a willingness to consider outsourcing, but companies are going to be concentrating so much on Y2K compliance that they are going to be diverted away from doing other projects,” he says. “I don’t actually see a reduction in the amount of outsourcing, but I don’t see a really large increase next year.”

Economic trends, however, do seem to support growth, according to Zahler. He points out that outsourcing began in the late 1980s and early 1990s in response to economic downturns comparable to the ones currently being predicted. Companies then considered outsourcing as a way to reduce costs internally and to get non-productive or non-core assets off their books and on someone else’s books. That scenario could be repeated, according to Zahler.

“To the extent that there is a significant downturn in the economy, I think there will be increased cost-cutting pressures on companies,” he says. “And there will be an increased look at outsourcing as a means of reducing costs and transferring assets. So I see that as a potentially significant economic impact that would increase the amounts of outsourcing taking place.”

He does expect large growth in the international market. Shaw Pittman has, in fact, opened a London office staffed with 10 attorneys who are dedicated to technology work. “That is based on our judgement that there will be, in the United Kingdom, Europe, and possibly Israel, a large increase in outsourcing type relationships over the next couple of years,” says Zahler.

What’s Hot — What’s Not

Among his prediction for 1999 are an increase in the renegotiation or renewing of outsourcing contracts and an growing desire for outsourced support of desktop and help desk. He says “the jury is still out” on whether or not a significant† amount of business process outsourcing will take place. He sees potential in the telecommunications arena.

“If the telecom companies can get their acts together, there is likely to be an increase in telecommunications type transactions,” he says. “The key there is turning over management of the network to AT&T Solutions, IBM or others who are offering network management services. I think people are starting to focus on the value of network management and how difficult it is.”

He also expects to see movement in enterprise resource planning systems. “There are a number of companies who tried to put together the design, build and run activities for such projects and package them as an outsourcing transaction,” says Zahler. “I think you will see the emergence of that next year.”

What’s Happening with the Internet

While Zahler sees much interest in the Internet/intranet area, he expects most of that activity to remain in-house. The reason, he says, is that there are no good vendors offering true outsourcing services for Internet type activities. Most advertising in that area, he notes, is from small companies offering to create web sites and perform similar work for ‘really small’ companies that have little in-house capability.

“Whether companies will start outsourcing their Internet activities really depends on the vendors being able to identify some value from using them,” he says. “I don’t think they actually have done that, to date. I’m not saying it can’t be done; I just haven’t seen any compelling places where vendors have indicated that they can do this stuff much better than people are doing it in-house.”

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