The issue of ICT contracts coming up for renewal was explored by a panel of MinterEllison and ITNewcom professionals and industry experts in Sydney in June 2019.

When should a purchaser start thinking about the next steps?

Our panel agreed that preparation is the key - and the sooner the better. In fact, the purchaser needs to be thinking at contract inception about including protection mechanisms to make a clean and painless exit when the agreement comes to an end.

Although no one, especially suppliers, wants to think about exit provisions at the time of negotiating a new agreement, it is important that this is discussed.

Typically, negotiating a strong transition out position will provide a stronger negotiation position at renewal time. Key elements include ensuring that the purchaser has enough flexibility to determine if the agreement should continue past its initial term – for example, extension provisions can provide a valuable buffer in some cases.

After the execution of an ICT contract, it is recommended to start the assessment of the available options six to 12 months before the scheduled contract expiry date. This should offer a reasonable timeframe to make a proper assessment of:

• the scope of the services and their suitability for the business' purposes;
• the volume of services that are actually required by the organisation;
• whether the purchaser/supplier relationship remains, or is, a strategic relationship;
• duration of the relationship, including whether it should continue in the future; and
• whether the supplier is meeting budget.

What are some of the key things to consider in ICT contracts?

When evaluating what to do next, a purchaser needs to review a number of issues including:

• Has the supplier met expectations and performed well against the applicable KPIs? Bundled within this question is a number of key concerns: Has the supplier met the budget? Is the organisation satisfied with the supplier's products/services? Has the supplier delivered value for money? (Keeping meaningful records during the life of the contract is important.) Unfortunately, in some older or poorly written contracts, KPIs may not have been present – a surrogate for KPIs can be satisfaction indicators or a measure of whether or not the level of service is broadly meeting the needs of the end users of the services. 
• What is the current demand requirement? An organisation's requirements for the products or services may have changed since the start of the contract – in fact they may no longer be even needed. Alternatively, the organisation may be more dependent on the relevant products and services provided by the supplier.
• Market review. Over the life of the contract, new suppliers may have come onto the market with more innovative offerings, cost effective options or next-generation improvements. At other times, current market conditions may be less favourable for purchasers and better commercial outcomes could be achieved by delaying going back to the market.
• How good is the existing deal? There may be specially negotiated provisions in the contract which make the current supplier arrangements particularly attractive. These can include rates, limitations on liability, warranties, free service upgrades among others. At the same time, it might be difficult to use the existing ICT contract with the procurement of services based on new technology. By way of an example, in the current environment, there are challenges in adding cloud offerings into ICT contracts which were negotiated some time ago, when software would typically be installed on the purchaser's servers.
• What else is the organisation undertaking at the moment? An organisation may have a number of projects going on across the business and, from a resourcing and business continuity perspective, it may not be feasible or practical to go to the market at this time.
• What risks are being introduced into the business by going back to the market? This requires the consideration of issues such as 
  • supplier risk (unknown performance of a new supplier)
  • transition risk
  • IP risk and
  • market risk (are the conditions favourable for going back to the market?)
• Is the service fit for purpose? There may not be a case for making a change but it might be worthwhile improving the governance around a particular supplier, pricing or some other aspect of the contract. Alternatively, there may be suppliers in the market providing the required products and services in new and improved ways or more cost effectively.

Considering options as an ICT contract nears its end

There are a handful of options that an organisation can consider exploring as an ICT contract nears its end.

• Extension: this provides the purchaser with additional time to evaluate the current commercial arrangements and decide on the most appropriate course of action. This may involve the contract renewal with the current provider or the replacement of the services. An extension option is typically written within the contract and must be exercised within a prescribed period of time.
• Renewal: if the purchaser believes the current supplier has delivered a good outcome for the organisation and value for money, renewing the contract may be the best option and should be included in the assessment of options.
• Back to market: the purchaser may decide that a better outcome can be achieved by going out to market. There are significant costs associated with this option including developing the tender documentation, notifying the market, evaluating the submissions, negotiating with the short-listed suppliers prior to appointment and the most significant cost, transitioning from the incumbent to the new. However, these can usually be offset by the benefits of better service delivery, greater innovation and/or lower costs.
• Insourcing: this option is gaining favour again where purchasers have found that outsourcing did not meet the organisation's expectations. On the plus side, insourcing allows better overall control of the service or products and more agility for implementing change. However, often (although not always) there are higher costs involved with insourcing and a key consideration is the effort required to build an internal capability to run the service(s).

Dealing with suppliers

Although they may not initiate the 'now what?' conversation, suppliers are generally thinking ahead and are often more aware than the purchaser that a contract may be coming to an end. They expect to continue and grow the relationship and will be looking at ways to entice the organisation to, at least, retain the current arrangement.

Faced with the potential loss of a contract, suppliers have been known to engage in fear tactics raising the spectre of migration risk as a potent deterrent to an organisation that may be thinking of going to market. In this scenario, it is up to the purchaser to make a careful assessment and weigh up the pros and cons of each alternative.

Ultimately, an organisation's relationship with a supplier must provide a 'win-win' outcome for both parties - otherwise it is not sustainable in the long term. Aim for a collaborative negotiation approach in which the requirements and solution specifics are openly discussed and risks and rewards are shared between the purchaser and supplier.

Comprehensive information is required to go to market and to get accurate pricing from suppliers. The more information an organisation can provide to feed into the negotiation process with a new supplier, the better outcome it will typically secure.

An organisation can create competitive tension without necessarily incurring the cost of going to market. Convincing the supplier in some way that the organisation is considering other alternatives is sometimes an effective way to bring the supplier to the negotiating table.

'Failing to plan is planning to fail'

As more and more organisations digitise their products and operations, they are becoming increasingly reliant on external IT providers. In such an environment, sourcing contracts are critical.

Effective management of the contract's end of life has major consequences for how a purchaser will continue to deliver the service and most effectively realise value for the organisation.

As the old saying goes 'failing to plan is planning to fail' and, in our experience, planning should begin as early as possible to ensure an organisation is able to secure a favourable outcome.

Speak to our IT Law and IT Consulting teams to discuss your ICT contracts.