The commoditisation of IT services

7 August 2015

Are customers losing the ability to negotiate contract terms?

There was a time when contracts for IT services would routinely run to hundreds of pages of heavily negotiated clauses.  But as more and more IT services move to a one-to-many, 'as-a-service' delivery model, IT contracts have become commoditised in much the same way with a trend towards standard-form and more supplier-friendly documents.

For customers, the challenge is getting used to the idea that they won't always have available to them service credits, hefty liability clauses, reporting obligations and other traditional mechanisms used to allocate and mitigate risk.

Standardised service offerings are able to be offered at a lower price because every customer gets the same services on the same terms – terms which will typically operate in favour of the supplier and require the customer to accept more of the risk around service delivery.  A customer can seek changes to those terms, but will often be met with the response that it will have an impact on the cost.  This is, in large part, the reality of dealing with a supplier operating a multi-tenancy environment – bespoke changes for one customer might impact other customers, or simply be uneconomic.

That is not to say that this trend is necessarily a bad thing – informed customers can choose to take the benefit of a lower-cost delivery model, along with the scalability of a commoditised service, less financial investment and (usually) the ability to exit on notice.  And customers with volume or other contributors to bargaining strength will prove there remain exceptions to the rule that standard terms can't be negotiated.

It's also not to say that there is no scope for negotiating terms for commoditised multi-tenanted services.  Customers should of course remain focused on identifying and mitigating the key risks for them in any given service arrangement, including by negotiating the relevant terms or by finding a supplier that gives them the desired level of comfort.  However, customers will save time and cost if they identify early on:

  • The extent to which the supplier's standard terms can be varied without leading to additional supplier cost and an increase in price

  • What's really important to them and what they can live without.

    For some customers, these sorts of discussions may require a change in mindset. Rather than focusing their energies on re-writing the supplier's terms, there may be more value in spending time in focusing on how the supplier measures up – both contractually and practically – in the most critical areas such as:

For some customers, these sorts of discussions may require a change in mindset.  Rather than focusing their energies on re-writing the supplier's terms, there may be more value in spending time in focusing on how the supplier measures up – both contractually and practically – in the most critical areas such as:

  • The supplier's commitments to security and confidentiality of the customer's data, and how that data will be stored (eg, on stand-alone equipment or on virtualised servers)

  • The robustness of the supplier's business continuity and disaster recovery procedures (and how often they've been called into action)

  • The customer's ability to access its data (during and after the contract term), where it will be hosted and the consequent privacy and data sovereignty implications

  • The customer's legal and practical ability to exit the agreement and transition to another supplier.

A useful due diligence exercise will also be to look at the supplier's market reputation and track record, by asking for testimonials and speaking to other customers.

This article was written by Allan Yeoman, partner in our ICT team, for the National Business Review (NBR) on 31 July 2015.