UnitedHealth Group Inc and Nortel Networks Inc are two of the latest companies to scale down their IT outsourcing contracts, as a wave of renegotiation sweeps through the outsourcing sector.
This week, health insurance company UnitedHealth Group said it would pay $4.8m to IBM Global Services to terminate a part of the contract it agreed with the vendor in February 2003, in order to run some of the outsourced mainframe services in-house.
Computer Sciences Corp confirmed in its first-quarter results announcement last week that Nortel Networks, one of its largest clients in the commercial sector, had also decided to take back in-house some of the services included in the two companies’ $3bn contract announced in July 2000. El Segundo, California-based CSC said it was negotiating the contract alteration with Nortel, and would take an impairment charge of no more than $80m as a result.
Outsourcing advisory firm TPI Inc found that the use of restructurings on outsourcing contracts had risen to a record level in the first half of 2005. It said that renegotiations made up 20% of the total contract value of signings during the first half, indicating that clients are much more demanding of their service providers.
A survey of 200 executives from European companies in May by research company Gartner Inc found that nearly 80% of all outsourcing relationships would be renegotiated. Lack of flexibility was cited as the main issue leading to renegotiations, followed by a need to improve the relationship between the supplier and customer.
Marly Didizian, a partner in the outsourcing practice at legal firm Linklaters, said: Customers renegotiate for a number of reasons. Most boil down to them not realizing the benefits they were expecting from the outsourcing, possibly because the supplier is not delivering on its commitments, or there is a mismatch of the parties’ expectations in the contract, or the customer is not managing the relationship effectively, or the arrangement does not provide sufficient flexibility.
She added: Customers are also looking at the big deals they have signed, often with a prime provider, and may conclude that they are better served by bringing some functions back in-house, or moving them over to a best-of-breed supplier, which also mitigates concentration risk. This is partly a reflection of outsourcing becoming a more mature marketplace.