Canada: Value Drivers For IT Outsourcing Deals In An Economic Downturn — Part I

Outsourcing — the practice of handing over responsibility for the execution of many IT functions to an outside supplier like IBM — can be a shrewd business strategy in any economic climate. What we are learning as a result of the last number of months of hard economic times, is that outsourcing deals can become even more compelling in a recession. Why? Two words — "reduced costs."

What is happening in the outsourcing marketplace is that astute customers who have contracts with one or two years left on them are not waiting until these contracts run to the natural end of their terms. Rather, they are doing early renewals now, and adding three to five years onto the duration of the new contract, thereby concluding a new five- to seven year deal.

It's All About Reduced Costs

Why would a customer go through the cost and hassle of an early renewal of a major outsourcing agreement? These are significant contractual arrangements. A renewal will involve all sorts of updating of the paperwork, and copious homework to bolster that effort. So, why go through all this when you don't really have to? Two words — "reduced costs."

The deal is actually fairly straightforward. In return for the customer agreeing to tack extra years onto the current agreement, the supplier delivers new, lower prices immediately. Therefore, the customer doesn't have to wait two years to get a material reduction in its IT costs; rather, it can get them now. And now — in the middle of these harsh economic times — is when the customer really needs these additional cost savings.

A Win-Win Proposition

So what's in it for the supplier? Why would the supplier want to open up what is likely a fairly lucrative contract, and offer price reductions immediately? The last couple of years of an outsourcing agreement tend to be the most profitable for a supplier, so why give these up in favour of providing the customer with immediate price cuts? Three words — "avoid an RFP."

Consider the likely scenario where there is no early contract renewal of the existing deal. About 18 months before the contract ends, the customer will go to market with a Request for Proposal (RFP). The RFP will go to multiple suppliers. That means a competitive dynamic will be engaged, with the incumbent supplier having to bid against potentially much hungrier competitors. The incumbent supplier may lose the account to one of these competitors. But even if it keeps the work, it will be at reduced fees. And it has to bear the significant cost incurred in participating in a full-bodied RFP process.

Therefore, an early renewal of an existing deal has some real attractions for the supplier. Sure they will have to lower prices — but this was inevitable in any event. But on the positive side of the ledger, the supplier gets to keep the customer, and the term of the deal is extended another three to five years. Particularly in an economic downturn, this is a good result for the supplier — especially if, in the alternative scenario, the supplier loses the work altogether.

The Implications of Reduced Costs

How does the supplier effect the immediate cost savings? This is a very important question, one that all customers need to ask their suppliers ― not least because the answer will likely impact the risk profile of the deal for the customer, which in turn means that appropriate adjustments need to be made to the outsourcing agreement to manage these risks.

For example, one way a supplier will invariably reduce costs is by having some of the work done by its resources located in lower cost offshore centres, such as India, the Philippines, South America or Eastern Europe. This presents a riskier service profile for the customer, particularly if the supplier needs to handle personal information of customer's employees or clients in these foreign jurisdictions. Accordingly, amendments typically have to be made to the outsourcing agreement to 'beef up' confidentiality, privacy and security provisions. Also, the agreement's limit-of-liability clause needs to be revisited to ensure that the supplier is bearing a fair share of these additional risks.

Another cost reduction strategy involves moving the customer from a 'dedicated' service delivery model (e.g., where an entire mainframe computer is used only to process that single customer's data) to a 'utility' or shared-service delivery model (e.g., where the supplier's mainframe would support two or three customers simultaneously). Again, such a shift in the delivery solution will warrant some changes to the outsourcing agreement, in order to mitigate the greater risk presented by the new operations structure.

Watch the Pricing Fine Print

Where the supplier proposes to reduce costs by delivering a certain portion of the services from offshore centres — such as from India — you have to be very careful with the details proposed by the supplier around the new, lower pricing. Yes, the new unit pricing is reduced from the previous price, but — and this is a big but — the supplier likely will want to provide that the new price is now subject to foreign-exchange risk and foreign inflation adjustment. For example, if the Indian rupee appreciates against the Canadian dollar, the supplier wants you to bear this extra cost. Likewise, if Indian inflation exceeds a certain amount, the supplier wants you to pay the increased amount.

These two pricing issues — foreign exchange risk and foreign inflation — have become very contentious points in outsourcing deals that include a material offshore component. These two items can add significantly to the overall cost of a renewal deal (calculated over its entire length).

There are numerous ways to address these points. One is to shift the risk entirely to the supplier, but typically this is only done in return for a fixed-premium amount that is added to the regular monthly fees (in effect, this premium acts somewhat like insurance). Or, some customers are willing to agree to graduated risk-sharing formulas — such as the first three per cent of foreign inflation being the responsibility of the supplier, the next five per cent of inflation being shared 25-75 per cent, and anything above eight per cent being shared 50-50 per cent. How you approach this issue often is determined by how international your business is, and how comfortable you are manoeuvring in the world of foreign exchange and foreign inflation.

Responding with Greater Flexibility

One argument for having the supplier bear the entire risk for offshore inflation and currency risk is that the supplier is in the business of operating in many countries, and can therefore hedge this risk by shifting production to new, lower cost venues as warranted over the life of the new agreement. Indeed, the supplier is probably going to do something like this in any event, in order to keep your fees declining — and the supplier's margins healthy. So, there is a strong argument that the supplier has already baked into its price any foreign exchange and inflation risk.

In a similar vein, however, you must be willing to be fairly flexible in allowing the supplier to provide you service from different countries. Certainly you will want some pre-approval rights on the facilities from which the supplier provides the services, but you can expect this discretion on your part to be somewhat fettered so that it only speaks to issues such as site specific security, rather than to whether certain services can be provided from a specific country to begin with. In short, the more inflation/foreign currency risk you want the supplier to take on, the more flexibility you will need to show about site locations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.