Locked-in. Calling Time on the Multi-Year Support Contract

The challenging economic climate of recent years has affected every one of us. Businesses large and small have had to face the consequences of the credit crisis, and tackle issues that no business continuity plan can prepare them for. We’ve seen the demise of many household names and, despite a recent uptick in many country’s economies, some industry commentators suspect there may be more to follow.

For IT executives and their teams, delivering ‘business as usual’ support through these challenging times may feel like a bit of a misnomer. But, whatever the economy is doing – whether it’s up, down or stagnating – IT still must provide stable, robust systems that can cope with the rigours of an ever changing environment. Many IT departments have coped admirably in balancing a flatlining budget – ensuring that maintenance and support costs are kept in check and investing only in projects where a good return can be made.

One challenge that does seem to persist for many IT executives however, is in the effective renegotiation of multi-year extended support or services contracts that no longer reflect their business reality. These contracts lock-in IT departments to an agreed set of services delivered over a period of several years.

Extended Contracts – the Upsides

Extended contracts are often a result of having agreed terms in better times when planning horizons were longer and companies more confident of long term performance. Indeed, agreements for support services that span several years do seem like good business logic for many reasons. For one, the total value of the contract is usually offered at a highly preferential rate, as the longevity of the contract provides a service partner with guaranteed revenues across the period of several years (meaning that they don’t need to incur cost in finding new business). It also helps the service partner to plan their workforce more efficiently and allocate resources in a more predictable way. For the IT Department, not only is the price more attractive, but the contract longevity means that once the knowledge transfer is complete, it’s a task that doesn’t need thinking about for some time.

The Renegotiation Challenge
In today’s uncertain business climate there can be significant drawbacks to signing a multi-year agreement. Renegotiating the terms of an existing contract due to a change in business conditions is very difficult unless there is some kind of ‘quid pro quo’ factored in – a recent example of which can be seen in the HMRC Aspire contract which was recently renegotiated to include an extension until 2017.

Indeed, the findings of a survey carried out by sourcing company Alsbridge in June 2013 concluded that almost two thirds of senior IT executives do not think their suppliers would be open to renegotiating IT decision makers outsourcing contracts. The survey, based on the inputs of 250 senior IT decision-makers in mature European markets, said that 65% of respondents believed that suppliers would not be open to renegotiating and 48% think the suppliers would ‘kick up a fuss’ if asked to renegotiate.

Commenting on the findings, Alsbridge Managing Partner, Rick Simmonds says: “…if the business need or the technology world has changed, then it is incumbent on suppliers to be receptive and not keep their clients in the stranglehold of an outdated contract”. The survey findings however, suggest this is not always the case.

In a similar vein, an article in Computer Weekly on the subject of contract renegotiation cites the economic conditions as a driving force that is seeing many buyers looking to cut costs and improve the performance of services suppliers. Kit Burden, head of technology sourcing at law firm DLA Piper said: “As a customer’s business has constricted during the recession, the pricing regime hasn’t flexed as much as intended and so the deal has become uneconomic”. Economics alone however, is not always the key driver for renegotiation, with Peter Schumacher, CEO at management consultancy Value Leadership Group, pointing out that “A typical problem is that incumbent suppliers – offshore and traditional – become complacent over the years. Contracts are often renegotiated or a second supplier introduced to keep the prime supplier on its toes and create a wake up call”.

Calling Time on the Multi-Year Contract

There are a number of ways in which companies can attempt to extricate themselves from contracts that are delivering on neither value nor performance, but it’s not always straightforward, and in almost all cases, it will involve some goodwill on the part of the supplier. There is plenty of advice available online, and of course there are many professional service companies and law firms specialising in just these issues for those who are currently considering their options.

Moving forward however, there is a way to eradicate the issue altogether – and that is not to sign a multi-year contract. Sounds simplistic and actually, it is. At Invenio, we encourage our customers to opt for a one year contract period. For customers who prefer the security of a contract that maps out service and support provision across a five year period, we simply insert a break clause that clearly states the customer is free to curtail the contract at any time – with no penalty. Crucially, whether it’s a one – or five – year contract, the cost is the same (thereby alleviating any concerns about whether or not a customer has secured the best deal for their company!).

A ‘no lock-in’ policy brings other benefits too, in that our support teams must be at the top of their game – day in and day out. There is no room for complacency to set in and therefore no cause for our customers to terminate their agreements with us. The result of this approach is that all our customers have had the freedom to choose our SAP support services over many years – and all of them have chosen to stay with Invenio.

Whilst this may be a radical departure from the norm – we think it’s a good one. After all, supporting ‘business as usual’ sometimes calls for an unusual approach.

In our next piece we’ll be taking a closer look at how those involved in ‘business as usual’ can help minimise the disruption of a new system implementation.