Companies are inking 10-year deals with IT/ITES service providers to focus on their core competence and gain cost advantages , but this might not be a good business model to follow. Nearly 40% to 45 % of these deals will get into trouble and hurt the concerned organisations. These deals stagnate, mid-life depression sets in and it is not a win-win situation, said IT research & advisory company Gartner. This leads to sub-optimal performance from outsourcing.
Almost 95% of all the IT outsourcing deals signed in India in the last two to three years will be 10-year long deals but it is not such a good idea to get stuck in long-term deals, points out Arup Roy, senior research analyst with Gartner?s Technology & Service Provider research organisation. ?The 10-year deals work well only in certain situations and is not appropriate for all situations. We recommend companies to sign up three to four year-base deal with renewals at 1+1+2 years so it works out to a seven year deal with renewal after three to four years,? said Roy. IT is too vibrant a space to remain stable for 10 long years with newer technologies, newer processes and changes taking place but the long-term deals are not flexible to take this into account, Roy added.
One of the reasons for these multi-year outsourcing deal is financial engineering that takes out some of the assets into the service provider?s books so the company?s balance sheet looks good and is attractive to investors. But these gains may be nullified with problems that crop up later.
The first generation outsourcing deals in India are repeating the same mistakes that their counterparts in the West did while outsourcing. ?There is a mismatch between expectations and reality when it comes to cost-savings.?
But Roy said the domestic IT services outsourcing market is growing. It was pegged at $6 billion. Gartner forecasts the market to grow at 18% between 2008 and 2013. But the domestic market landscape has changed dramatically and India has the fastest growing domestic market across the globe so Gartner is working on new estimates for the 2009-2014 period, Roy said.
Gartner lists the mistakes that companies make while getting into outsourcing deals with an external service provider. These range from cost saving need not well thought out, service level agreements are recycled and unaligned to business needs, relationship management not well defined, the service providers has the first right to refusal for new work to rushing the evaluation and negotiation processes and companies not using renewal options to improve the deal.