How to renegotiate an outsourcing deal

Part III: Renegotiating an IT outsourcing contract can be a tricky business. ZDNet Australia investigates the best way to approach it.

Part III: Renegotiating an IT outsourcing contract can be a tricky business. ZDNet Australia investigates the best way to approach it.


Elcom renegotiates with KAZ

Andrew Richardson, KAZ Technology Services
case study Elcom, one of NSW's largest credit unions, with 26,000 members, was among the first credit unions to embrace outsourcing when, in 1999, it contracted KAZ Technology Services to manage its mission-critical IT systems.

With the five-year contract due for renewal in 2004, the company took the opportunity late last year to test the market by making the renewal a competitive tender.

Paul Johnson, CEO of Elcom says "Going to a wider market is an important opportunity to learn about new services and technologies beyond those offered by the incumbent provider. If you don't ask, you won't know what else might be available." To maintain audibility, Elcom adhered to a process that ensured each vendor had exactly the same information and opportunity to pitch. "The best fit for Elcom's needs was a balance of service, responsiveness, and price. What's important is to establish key criteria well in advance and ensure that these are understood by all members of the negotiating team," he says.

The contract with Kaz was first signed in March 1999, to provide full facilities management to host two AS400 IBM machinesââ,¬"one mission critical, one a disaster recovery machine.

"We didn't want to get caught out wanting to make a change and find we didn't have enough time to do it," says Johnson. In July 2003, two other providers were investigated. "We indicated to Kaz that we were going to market to look at other alternativesââ,¬"Hansen Technologies and Transaction Solutionsââ,¬" both providers who run the operating system and banking system we use, and who provide services to other credit unions," says Johnson.

Elcom dealt with the two companies directly. Six weeks later, the vendors were compared on their strengths and weaknesses and their cost effectiveness. "We wanted to work with someone who could provide coverage and stability. Kaz was the most cost effective of all three, and had always provided excellent service levels," says Johnson.

The new 12-month contract was renewed on March 1st . "We've managed to negotiate additional services, such as network management. We have more stability, a wider access to their resources at a more competitive price," says Johnson. "The first contract we signed with Kaz was our first outsourcing contract and the first contract Kaz had with a credit union, so it's been a learning curve for us both."

Kaz's managing director Andrew Richardson thinks that "there a whole lot of outsourcing disaster stories and companies are reckless if they don't test the market".

"Elcom went to great pains to ensure a level playing field, and that is critical if you are to get a renegotiation right," he says. "A level playing feel is important, because it's expensive for providers to participate in tenders and we want to go into deals, whether we're incumbent or new, knowing that if we are best player with the best deal and best deal and solution we are going to win," he says. "If you look at some of the outsourcing deals that haven't worked, you'll see that customers want providers who help them improve their business rather than just manage the status quo," he adds.

According to Richardson, the onus on business and IT managers is to seek to get the best deal they can. "We are at a stage in the outsourcing market where a lot of customers have been round the loop once if not twice and are looking for what is better but not necessarily cheaper," he says. Richardson also maintains that it's better to start thinking about the end of a contract than the beginning, with too many customers and providers fixating on the tender process but not putting enough energy into disengagement strategies. "During renegotiation if a provider owns the equipment being used in the contract there can be a huge transition cost that the customer might not have thought of, and this guarantees that the customer won't get the best possible deal elsewhere," he says. "Depth of contract management ability is key and customers who have been round the loop once or twice will seek a level playing field and address disengagement issues at the outset and save them a lot of pain," he adds.

This article was first published in Technology & Business magazine.
Click here for subscription information.

Part III: Renegotiating an IT outsourcing contract can be a tricky business. ZDNet Australia investigates the best way to approach it.


Elcom renegotiates with KAZ

Andrew Richardson, KAZ Technology Services
case study Elcom, one of NSW's largest credit unions, with 26,000 members, was among the first credit unions to embrace outsourcing when, in 1999, it contracted KAZ Technology Services to manage its mission-critical IT systems.

With the five-year contract due for renewal in 2004, the company took the opportunity late last year to test the market by making the renewal a competitive tender.

Paul Johnson, CEO of Elcom says "Going to a wider market is an important opportunity to learn about new services and technologies beyond those offered by the incumbent provider. If you don't ask, you won't know what else might be available." To maintain audibility, Elcom adhered to a process that ensured each vendor had exactly the same information and opportunity to pitch. "The best fit for Elcom's needs was a balance of service, responsiveness, and price. What's important is to establish key criteria well in advance and ensure that these are understood by all members of the negotiating team," he says.

The contract with Kaz was first signed in March 1999, to provide full facilities management to host two AS400 IBM machinesââ,¬"one mission critical, one a disaster recovery machine.

"We didn't want to get caught out wanting to make a change and find we didn't have enough time to do it," says Johnson. In July 2003, two other providers were investigated. "We indicated to Kaz that we were going to market to look at other alternativesââ,¬"Hansen Technologies and Transaction Solutionsââ,¬" both providers who run the operating system and banking system we use, and who provide services to other credit unions," says Johnson.

Elcom dealt with the two companies directly. Six weeks later, the vendors were compared on their strengths and weaknesses and their cost effectiveness. "We wanted to work with someone who could provide coverage and stability. Kaz was the most cost effective of all three, and had always provided excellent service levels," says Johnson.

The new 12-month contract was renewed on March 1st . "We've managed to negotiate additional services, such as network management. We have more stability, a wider access to their resources at a more competitive price," says Johnson. "The first contract we signed with Kaz was our first outsourcing contract and the first contract Kaz had with a credit union, so it's been a learning curve for us both."

Kaz's managing director Andrew Richardson thinks that "there a whole lot of outsourcing disaster stories and companies are reckless if they don't test the market".

"Elcom went to great pains to ensure a level playing field, and that is critical if you are to get a renegotiation right," he says. "A level playing feel is important, because it's expensive for providers to participate in tenders and we want to go into deals, whether we're incumbent or new, knowing that if we are best player with the best deal and best deal and solution we are going to win," he says. "If you look at some of the outsourcing deals that haven't worked, you'll see that customers want providers who help them improve their business rather than just manage the status quo," he adds.

According to Richardson, the onus on business and IT managers is to seek to get the best deal they can. "We are at a stage in the outsourcing market where a lot of customers have been round the loop once if not twice and are looking for what is better but not necessarily cheaper," he says. Richardson also maintains that it's better to start thinking about the end of a contract than the beginning, with too many customers and providers fixating on the tender process but not putting enough energy into disengagement strategies. "During renegotiation if a provider owns the equipment being used in the contract there can be a huge transition cost that the customer might not have thought of, and this guarantees that the customer won't get the best possible deal elsewhere," he says. "Depth of contract management ability is key and customers who have been round the loop once or twice will seek a level playing field and address disengagement issues at the outset and save them a lot of pain," he adds.

This article was first published in Technology & Business magazine.
Click here for subscription information.

Part III: Renegotiating an IT outsourcing contract can be a tricky business. ZDNet Australia investigates the best way to approach it.


Elcom renegotiates with KAZ

Andrew Richardson, KAZ Technology Services
case study Elcom, one of NSW's largest credit unions, with 26,000 members, was among the first credit unions to embrace outsourcing when, in 1999, it contracted KAZ Technology Services to manage its mission-critical IT systems.

With the five-year contract due for renewal in 2004, the company took the opportunity late last year to test the market by making the renewal a competitive tender.

Paul Johnson, CEO of Elcom says "Going to a wider market is an important opportunity to learn about new services and technologies beyond those offered by the incumbent provider. If you don't ask, you won't know what else might be available." To maintain audibility, Elcom adhered to a process that ensured each vendor had exactly the same information and opportunity to pitch. "The best fit for Elcom's needs was a balance of service, responsiveness, and price. What's important is to establish key criteria well in advance and ensure that these are understood by all members of the negotiating team," he says.

The contract with Kaz was first signed in March 1999, to provide full facilities management to host two AS400 IBM machinesââ,¬"one mission critical, one a disaster recovery machine.

"We didn't want to get caught out wanting to make a change and find we didn't have enough time to do it," says Johnson. In July 2003, two other providers were investigated. "We indicated to Kaz that we were going to market to look at other alternativesââ,¬"Hansen Technologies and Transaction Solutionsââ,¬" both providers who run the operating system and banking system we use, and who provide services to other credit unions," says Johnson.

Elcom dealt with the two companies directly. Six weeks later, the vendors were compared on their strengths and weaknesses and their cost effectiveness. "We wanted to work with someone who could provide coverage and stability. Kaz was the most cost effective of all three, and had always provided excellent service levels," says Johnson.

The new 12-month contract was renewed on March 1st . "We've managed to negotiate additional services, such as network management. We have more stability, a wider access to their resources at a more competitive price," says Johnson. "The first contract we signed with Kaz was our first outsourcing contract and the first contract Kaz had with a credit union, so it's been a learning curve for us both."

Kaz's managing director Andrew Richardson thinks that "there a whole lot of outsourcing disaster stories and companies are reckless if they don't test the market".

"Elcom went to great pains to ensure a level playing field, and that is critical if you are to get a renegotiation right," he says. "A level playing feel is important, because it's expensive for providers to participate in tenders and we want to go into deals, whether we're incumbent or new, knowing that if we are best player with the best deal and best deal and solution we are going to win," he says. "If you look at some of the outsourcing deals that haven't worked, you'll see that customers want providers who help them improve their business rather than just manage the status quo," he adds.

According to Richardson, the onus on business and IT managers is to seek to get the best deal they can. "We are at a stage in the outsourcing market where a lot of customers have been round the loop once if not twice and are looking for what is better but not necessarily cheaper," he says. Richardson also maintains that it's better to start thinking about the end of a contract than the beginning, with too many customers and providers fixating on the tender process but not putting enough energy into disengagement strategies. "During renegotiation if a provider owns the equipment being used in the contract there can be a huge transition cost that the customer might not have thought of, and this guarantees that the customer won't get the best possible deal elsewhere," he says. "Depth of contract management ability is key and customers who have been round the loop once or twice will seek a level playing field and address disengagement issues at the outset and save them a lot of pain," he adds.

This article was first published in Technology & Business magazine.
Click here for subscription information.