Long-term vs short-term ICT outsourced contracts

Are South African companies losing out on the advantages long-term contracts?

December 11, 2009

Long term ICT maintenance contracts, while common in other parts of the world, seem to be less popular in the South African market. Are South African companies losing out on the advantages long-term contracts?

Organisations are fast realising the benefits of outsourcing ICT projects and skills, allowing them to focus on their core business and leave the specialist area of ICT to, well, the specialists.  When faced with the choice of whether to sign a long- or short-term contract with an outsourced ICT provider, the trend in South Africa seems to be to go for the ‘safer’ option – the less binding, short-term contract.

What many of these organisations don’t realise is that a long-term contact can deliver significant benefits. This raises the question: why has this trend developed? And are local organisations are making the right choice?

RDB Consulting, a local database and Operating System outsourcing and consulting company, and its branch in the Netherlands, RDB Benelux, have noticed a discernible difference in approach when it comes to signing maintenance contracts in the two regions.

Says Jaroslav Cerny, CEO at RDB Consulting, “In the 18 years I have been in South Africa, I have noticed that South African companies are reluctant to sign three-year maintenance contracts. Perhaps this is a symptom of a more general trend – South African companies are ‘slow adopters’ rather than pioneers and generally take a cautious stance with any ICT investment. These organisations are missing out on the benefits a long-term contract can deliver.”

The main benefit of a long-term contract is pricing. Long-term contracts generally feature preferential pricing, due to the commitment from the client. This reducing in pricing can deliver a significant return on investment (ROI) down the line.  The discount on a long-term contract can be as much as 20%, significantly reducing ICT costs and spend. If any additional work is required over and above the contract, preferential pricing on hourly rates is also usually given.

Another factor is the benefit of a stronger relationship between the outsource provider and the client. A point often reiterated when it comes to outsourcing of any nature is the importance of a good relationship between the two parties, and a deep understanding of the client’s business on the part of the outsourcing company.  These are factors that often improve considerably over time.

Says Remko Visser, Managing Director at RDB Benelux: “One example is the hospital Ziekenhuis Rivierenland in the Netherlands. The hospital needed to optimise its Oracle database environment and outsourced the maintenance thereof to us. They required a pro-active monitoring service rather than a reactive one; and this meant that we needed to develop a comprehensive understanding of the running of the hospital, its needs and obstacles, and how best to optimise its operations. As each IT infrastructure is unique, our depth of understanding of the hospitals environment will continually improve our ability to tweak our solution to their specific needs”.

Says Niek Van Beers, IT Director at Ziekenhuis Tiel, “Our decision to sign a three year contract with RDB Benelux was based not only on the discount on our annual contract and on extra hours required over and above the contract; but also on the fact that we expect to benefit from a long-standing relationship with RDB Benelux”.

Outsourcing ICT over a long-term period takes away the worry of attaining and retaining highly specialised skills, allowing organisations to focus on other core functions of the business. In the skills scarce market, this is a major concern of any organisation that embarks on a project and then requires maintenance and support thereafter. Having the peace of mind that the right outsource provider has been secured means that management are spared the laborious process of sourcing a new provider every year, and that budgets can be determined and accounted for in advance.

The flip side

Despite the advantages of long-term contracts, the decision to favour shorter term contracts in not unfounded. The prospect of being stuck with an outsource provider that is not meeting an organisation’s requirements, or meeting the bare minimum, is often what impels organisations to choose shorter contracts.

The mentality is that providers who win shorter contracts will be more determined to ensure the contract is renewed when it expires; and this pressure will drive them to go the extra mile for the client. This may be true; yet there are ways in which organisations can gain reassurance that their needs will be met and benefit from the advantages of long-term contracts.

Choosing the right outsource partner is vital

Selecting the outsource provider that will work best with your organisation can be challenging. There are a few key considerations that should be taken into account. It is fundamental to ensure that the outsource provider you choose provides technical staff that are appropriately certified according to their level of experience and position; and that multi-platform, multi operating system support is offered.

While Service Level Agreements (SLAs) are fairly standard, you should insist on one that includes clearly laid out details, such as mean-time-to-respond, mean-time-to-repair and escalation procedures all the way to the top level.

This should be combined with an Operations Level Agreement, (OLA) – a contract that specifies how the SLA is executed; something which is often not included as a standard procedure. Your outsourced partner should include a Service Delivery Manager to monitor the service delivery of the project as well as the quality thereof. Regular on-site management meetings will allow the outsourced partner to communicate the progress and completion of project ‘milestones’ or simply let the customer know, in person, exactly how things are progressing. The client must insist on comprehensive documentation of everything that pertains to the project or ongoing support.

Lastly, when selecting an outsourced partner, ensure they have a strong client base and good track-record in retaining annuity contracts for a minimum of five years. In addition, obtain contact details from the outsourced company for annuity contract and project references that have well defined objectives and goals. Establishing the ability of the outsourcer to listen, understand and collaboratively work on defining metrics, goes a long way in minimising misunderstandings before any contracts are signed.  It is vital to select one that brings value to your organisation, and delivers on all of the service promises it makes.