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IT contract terminations highlight increased buyer power

A number of high-profile cancellations and replacements show an appetite and willingness for firms to change their IT contracts.

By Miya Knights, 15 Aug 2008 at 13:36

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An analyst firm has today said the recent spate of IT services contract terminations - and changes in supplier - suggests a shift in power towards the customer.

This week, Transport for London (TfL) gave notice to TranSys on its contract to run the Oyster card, while Barclays has decided not to renew a business process outsourcing (BPO) deal with Siemens. In March, the Department of Work and Pensions (DWP) terminated a deal with the same provider.

Pierre Audoin Consultants(PAC) said that, with some outsourcing relationships being several generations old, outsourcing customers now have the experience to develop more robust platforms from which to bargain.

“Today's rigorous contracts are enabling clients to more easily escape or transition away from incumbent suppliers,” it stated.

Despite this shift in the balance of power towards the customer, the majority of businesses are still choosing to remain with their incumbent supplier, as this is the option that carries the lowest risk and potential for disruption.

PAC's "Deal Tracker", which records all publicly disclosed IT services contracts awards, shows that of those UK companies that updated their outsourcing deals during the first seven months of 2008, just 13 per cent switched to a new supplier.

The analyst said a factor that could impact this trend for renewals is the accelerated merger and acquisition activity in the second half of 2008. This would have ramifications for these companies' IT services and BPO providers, with incumbent providers left wondering whether the new owner will bring in its preferred supplier or even take the service back in-house.

For example, it said RBS, which historically has preferred to run most of its IT in-house, recently acquired ABN Amro. “Reports in the Dutch press claim that RBS is considering reversing some of ABN Amro's outsourcing deals. As these contracts have a total value of $2 billion, there is a lot at stake,” said PAC.