Assessing Outsourcing Contract Value: A Pragmatic Approach

November 14, 2011: Very often the terms and conditions of most of the outsourcing contracts changes with time, at the least in terms of margins. But in the case of contractual best practices, the of which undergoes little changes over a definite term of the contract. Mean while the significance of the same changes in relation to the ongoing and emerging risk. Events like collapse of Satyam and the terrorist attack on Mumbai made the customers realize the risk involved in relying on a key service provider.

Satyam was acquired by Mahindra which was strong move that made Satyam to return to the glory. The Mumbai model attacks were never repeated. So such issues with service providers and dangers have now become matters of low priority. Now the issues that the customers are concerned with are more over near term in nature.  

The outsourcing industry which was badly affected by the recession has now started to grow. This has put renewed pressure on costs and fees. Recently the power balance between the clients and service providers are shifting and increasing cost is a matter of concern for global clients and suppliers in India. In addition to cost concern, the issue of liability is also gaining attention among clients who are involved in shifting their current services to cloud.

The changes that occur in the market recently have enabled the clients with revised perspectives and requirements to reevaluate their contractual foundations. To be on a safer side, a recent research from Forrester advices the suppliers to take into accounts the changes in outsourcing contractual best practices with time. 

Recently the clients have started to focus on liability clauses in the contracts as their focus on cloud increases. According to many of the Forrester clients, the service providers who offer cloud services are not ready to take up the liability for exposure of important data. So with this issue Forrester has lost a client recently.

With the increase in industry consolidation, change of ownership provisions should be updated. It is quite often very difficult to predict the different entities that will be subject to consolidation. So clients should expect some amount of volatility in the cloud services.

In some cases the change of control will lead to the termination of existing contracts

In the present day market, it is often difficult for clients to demand for and receive discounts in their price. Clients should be careful that service providers do not increase the price too far to increase their profit. There are instances in which changes can be accommodated, where the contract extends over a long period. But still clients should always have a look at the labor cost services so that can stay informed about any changes in cost, if any occurs. In addition to this clients should incorporate provisions in the contract which will prevent the service providers from increasing the price beyond a certain limit.

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