Outsourcing Deals: Better the Second Time

Outsourcers apply lessons learned to drive superior deals.

Everyones always looking for a better deal, arent they? Hey, better deals are closely related to the pursuit of happiness, which is, after all, one of our nations founding principles.

So why is it that outsourcers and their customers are always so proud to announce really long deals—deals of seven, eight, even 10 years—that are probably longer than most marriages last? The only reason I can think of is that it makes a more impressive press release. Otherwise, it makes little sense to be tied to one outsourcer for so long.

Indeed, it appears that once customers sign these deals, they want them to be shorter. A recent Meta Group study found that although 80 percent of organizations will outsource at least one function by next year and 70 percent of that group will renew their contracts, many will cut back the scope and duration of the deal when they renew. The main reason is that customers find they need to regain control of their IT strategy and architecture, according to Dane Anderson, a Meta Group analyst.

"When contracts come up, customers re-evaluate. Often, user companies have rushed into contracts. When architecture and strategy have been outsourced in megadeals, people have discovered that they should keep these things in-house," said Anderson.

Not only are companies wont to change the scope of the deal, but they are also likely to swap outsourcers the first chance they get. Anderson noted that JPMorgan Chase once had a deal with Computer Sciences Corp. but jilted CSC last year and switched to IBM Global Services. Now, Anderson said, JPMorgan Chase is bringing some aspects of the IBM deal back in-house.

In another example of customer fickleness, Dow Chemical dumped EDS and flew into the arms of IBM Global Services, signing a seven-year agreement (will they never learn?) with Big Blue earlier this month.

The deal, worth an estimated $1 billion and encompassing 63 countries, covers LANs, WANs, voice and video communications. IBM will also provide e-mail for more than 50,000 Dow employees and contractors and support for 2,800 servers.

Next Page: The Navys venture into outsourcing waters.