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Saturday, July 24, 2004

Outsourcing: Renegotiating for value via Mckinseyquarterly

Mckinsey Quarterly's article on renegotiation for value writes, "many long-term IT-outsourcing agreements fall out of sync with a company's business needs and technology costs. After all, an outsourcing contract reflects a five- to ten-year forecast of a company's IT needs and a fair price to pay a vendor for meeting those needs. The size of the gap between what many companies are currently paying for IT outsourcing and the potential savings is surprising, however".Companies can obtain much better terms from their IT-outsourcing vendors by renegotiating their agreements. The article says, given the plummeting cost of technology and recent innovations in systems-management tools and processes, that gap may be substantial, especially for deals signed in the past two to five years. In real life experience—with companies in sectors as varied as banking, insurance, media, pharmaceuticals, and telecommunications—this mismatch can represent as much as 20 to 40 percent of the total cost of the contract, or hundreds of millions of dollars a year, depending on the size of the deal.To capture the biggest savings, companies should focus on specific situations. Contracts with heavy infrastructure costs, for instance, are a good target, since prices for hardware and storage have dropped by 25 to 36 percent each of the past three years while software prices have stayed relatively flat. Corporations whose needs have changed or whose usage of wide-area networks, computer-processing capacity, or data storage has risen or fallen sharply should also revisit their contract terms. In addition, older agreements and outsourcing arrangements that were not open to competitive bidding are likely to have large gaps between what companies are paying for IT services and the actual cost of providing those services.
The article highlights huge scope for cost reduction by outsourcing customers, if approached in a structured manner( Personally, I am not so convinced about this level of cost reduction) - Hope that India based Offshore service providers are factoring this line of thinking in devising their future strategies.

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