Five Steps to Take If Your Outsourcing Service Provider Is Sold
Merger activity is on the uptick among IT service providers and experts say the industry is ripe for more consolidation. Here's how to protect your company if your outsourcing provider is sold.
CIO — Future sale plans for outsourcing provider Affiliated Computer Services may be up in the air, but one thing is certain. More mergers and acquisitions are definitely in the cards in the IT services field.
“The industry is ripe for another round of consolidation,” says Gartner research director Dane Anderson. “IBM is going around scooping up things left and right. It’s all part of the next iteration of M&A activity that’s going to continue to go on.”
The activity is not new. IBM has been buying up companies for years: more than 40 software and services companies since 2000. El Segundo, Calif.-based Computer Sciences Corp. announced a few weeks ago that it will buy First Consulting for $365 million. Last spring, EDS paid $380 million to acquire a 52 percent stake in Bangalore-based IT and business process outsourcer Mphasis .
And then there are the offshore outsourcers—cash rich, with high market valuations, and an eagerness to expand their footprint in the U.S., Europe, Latin America and Asia. “I expect to see more deals like Wipro’s purchase of Infocrossing a few months ago,” says Chris Pattacini, vice president for outsourcing consultancy Nautilus Advisors , referring to the India-based outsourcing giant’s acquisition of an U.S.-based infrastructure provider. “And I expect many clients will be looking for help dealing with these issues.”
Given what experts expect to be a consolidating market for outsourcing service providers, it pays for customers to be prepared. Here’s what to do when your IT services provider is sold.
1. Keep an eye on service levels and delivery.
Once a merger transaction is complete, it means change for companies delivering services. Delivery and account management staff may get reassigned, removed or replaced, and retained knowledge of the client’s environment—that is, familiarity with your operations—can get lost. This can lead to service delivery problems.
“Once a deal is announced, clients need to provide clear expectations and more actively manage vendor performance—both delivery and change management,” says Pattacini of Nautilus Advisors. Post-merger layoffs and turnover resulting from uncertainty can disrupt front-end service teams and compromise back-office support.
Outsourcing customers should make sure you have meaningful service-level agreements (SLAs) in place now, including penalties for services not delivered according to the agreement. Also make sure your contract gives you the ability to terminate the agreement upon a change in control of the vendor or at least be able to terminate for convenience at a reasonable fee, says Pattacini.
