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Growth and innovation driving IT contracts negotiation, says expert

Out-Law News | 16 Apr 2014 | 8:17 am | 3 min. read

Businesses are increasingly more motivated to change existing IT outsourcing arrangements with suppliers by a need to grow and innovate than by pressures to cut costs and resources, an expert has said.

IT contracts renegotiation specialist Clare Murray of Pinsent Masons, the law firm behind Out-Law.com, said many traditional operators are looking to new technology to help them respond to threats posed by market disruptors. 

Murray was commenting after a new survey from sourcing advisory company Information Services Group (ISG) found that the annual value of outsourcing contracts (click through for 25-page / 2.67MB PDF) agreed within Europe, the Middle East and Africa (EMEA) in the first three months of this year are up 29% on comparable contract values during the first quarter of 2013 at €2.4 billion in total. 

The study also found that the number of outsourcing contracts finalised between the beginning of January and end of March this year was 165, up 21% on the same period last year. The ISG survey accounts for outsourcing deals with an annual contract value of at least €4 million. 

The study revealed particularly strong growth in the UK outsourcing market, where the annual value of the contracts finalised in the first quarter of the year totaled in excess of €1 billion, representing a 33% increase on the previous quarter and a 66% year-on-year increase. The total number of UK outsourcing contracts of at least €4m in annual value that were agreed during the first quarter was 59 and was "the highest number of contract awards in a quarter over the last three years" in the UK market, ISG said.

France is the second largest outsourcing market in EMEA with contracts with an annual value of €630m agreed in the country during the first quarter of 2014, according to the study. The number of outsourcing contracts awarded in France during the period also reached record levels for the country, it said.

The number of outsourcing contracts awarded in Germany during the first quarter of the year was up by 52% of the same number agreed in Q1 2013, although the annual value of those deals - €330m - was down slightly on both the previous quarter and the equivalent three months in 2013, ISG said. 

"In Europe and in particular, the UK, confidence is growing as the economic outlook improves and organisations are investing in technology and business change projects," Murray said. "This is reflected in a significant increase in the number and value of contracts awarded. Across our global clients, business priorities are now typically growth and innovation rather than cost-cutting and rationalisation. This is reflected in organisations’ IS or IT strategies and their approach to procuring and renegotiating the provision of services." 

"Established businesses are looking to innovative digital technologies to enable business change: to grow revenue and customers and to meet the challenge of new entrants disrupting their market," the expert added. "This is driving major transformation programmes. For customers of technology this means exiting or renegotiating their relationship with their existing supplier(s) often to facilitate a multi-sourced approach. For suppliers, this means revisiting their own supply chain and renegotiating and/or re-procuring services to improve their customer offering." 

According to ISG's survey, the annual value of IT outsourcing (ITO) contracts that were awarded during the first quarter of 2014 was €1.54bn, up from €0.98bn for ITO deals done in EMEA in the final three months of last year. Of the 165 outsourcing deals awarded in EMEA during Q1 2014, a quarterly record 127 of those were ITO contracts. 

However, the value of restructured outsourcing contracts in EMEA fell from €1bn in Q1 2013 to €0.6bn in Q1 2014, although the number of the deals completed during the period remained similar at 52 compared to 51 during the first three months of 2013. 

For restructured ITO contracts specifically, the total annual value of those contracts agreed during Q1 2014, €0.45bn, was below average for the past two years and below the €0.74bn value of restructured ITO contracts agreed in Q4 2013. 

Murray said she was "surprised at the extent of the drop in restructuring projects" but said that the fall may be accounted for in part by the fact that there is a trend for IT buyers to adopt a multi-source model: engaging a number of suppliers with short term contracts rather than primarily relying on a long term agreement with a single supplier. As more of the long term contracts are replaced by smaller, shorter contracts any change to those shorter contracts will not be reported as ‘restructuring’ but rather new, or extended, contracts, she added. 

"The primary business drivers for restructuring or renegotiating may have changed but we are still seeing a significant number of contracts being restructured," Murray said. "We are currently advising on a number of major projects which are in danger of failing and we are working closely with our clients to turnaround these troubled projects."