Working Effectively with Large IT Providers
Brad Peterson, Partner
Mayer Brown LLP
Large IT providers often enjoy enormous leverage with their customers. They provide mission-critical systems, products and services. They have powerful allies within their customers. Their position is protected by the enormous cost, large risk and years of effort that may be required to move away from a large IT provider. This leverage has increased as large IT providers acquire other IT providers.
With that leverage, it is not surprising that contracts with large IT providers tend to be riskier and less flexible for customers than other contracts. Similarly, it is not surprising that sourcing organizations can find it difficult to achieve their goals with Large IT providers.
What can you do as a sourcing or procurement organization to maximize value and mitigate risk in dealing with large IT providers?
Here are ten key steps:
1. Align Internally. Understand the roles and interests of your stakeholders, particularly those who depend on your large IT providers to get their work done. Set up a negotiation and relationship governance role separate from the operational and technical work with the large IT provider. Identify a senior executive responsible for decisions for the enterprise on each large IT provider. Create internal agreement on a single plan for dealing with each large IT provider.
2. Investigate Your Spend Profile. Find out on how much you are spending with each large IT provider and your possible future spend. This information might be available in your ERP system or from the large IT provider, and will help you estimate your leverage and target your effort. In particular, this information can help you evaluate “the size of the prize.” For example, if you spend $100 million per year with a large IT provider (presumably for greater value) and can improve the value delivered by 1%, the opportunity is over $1 million per year.
3. Investigate Your Contractual Relationship. A customer enterprise may have many contracts with a single large IT provider, each on different terms. The contract terms may differ radically because they were entered into with different companies that later merged to form the large IT provider. Identify those terms and the gaps between those terms and your preferred terms. Understanding your contractual position is the first step toward enforcing the rights you have and negotiating for the rights you lack.
4. Track Results. Design scorecards and systems to measure whether you are getting the results you want from each large IT provider. For example, you might measure achievement of milestones, user satisfaction and on-time delivery of promised operational improvements and savings. Keep logs of innovations proposed, reciprocal business and other types of value provided by each large IT provider. Similarly, track noncompliance, performance failures and breaches. Those are both problems to address and possible points of leverage.
5. Know Your Provider. Large IT providers make extensive quarterly disclosures in public securities filings. There is an astounding amount written every year about each of the large IT providers. Networking with SIG members can also be a valuable source of information. Use this information to identify risks and your large IT provider’s likely goals.
6. Choose Your Goals. Decide how your company wants to change its relationship with each large IT provider. Choose realistic goals, though. Limited leverage allows you to make limited changes. For example, your long-term goals might be improved performance, reduced cost, increased flexibility or more innovation. In the short term, your goals may be stepping stones such as more transparency, greater control and central relationship management.
7. Look for Opportunities. Your company likely will, at times, have the leverage required to cut a better deal with a large IT provider. For example, you might be outsourcing major IT functions and have IBM, HP/EDS, Dell/Perot and Xerox/ACS as bidders. These provide opportunities for negotiations.
8. Create Options. Investigate and document the actual limitations on your company’s ability to move to alternate suppliers so that you accurately understand your company’s options. Work to reduce dependence, technology lock-ins, all-or-nothing exit clauses and other constraints. Create a credible plan for switching to another supplier. Become able to vary your profitability for the large IT provider in meaningful ways.
9. Negotiate. Begin negotiations when you have clear goals, adequate information and a best alternative that provides you enough leverage to achieve change. Keep control of the negotiation process with all stakeholders deferring back to the negotiation team. Set clear milestones. If negotiations fail to produce desired results by the milestone dates, preserve credibility for the next round of negotiations by moving to your best alternative. If they do produce success, amend contracts to secure the commitment, ideally through an enterprise-level agreement.
10. Keep Up the Good Work! Regardless of whether negotiations provided the governance rights that you might need, implement a formal governance process. Hold regular meetings with each large IT provider at an enterprise level to review results and verify that commitments have been met. As part of the governance process, continue to maintain alignment, collect information, identify opportunities and options, and use points of leverage to negotiate to improve your contract. Doing so can produce continuous improvement in some of your company’s most critical relationships.