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Legacy IT systems can be upgraded through effective supplier contract renegotiations, says expert

Businesses looking to upgrade legacy IT systems but which find themselves "locked in" to a contract with an external supplier have to be prepared to renegotiate the terms in order to lower costs and improve the flexibility of how IT services are supplied, an expert has said.  14 Dec 2012

IT law specialist Charles Park of Pinsent Masons, the law firm behind Out-Law.com, said, though, that the process of doing so is not easy.

Park said that companies can find themselves both institutionally and contractually locked in to using legacy systems.

"In a way it is inevitable if you sign up to a comprehensive deal for any part of time that 'operational lock in' takes effect," Park said. "This is because the thought of changing contracts set against the inertia of staying with a supplier can act to dissuade firms from switching. In addition, both regulatory and business disruption risks are involved if firms elect to move away from existing legacy systems and providers to obtain access to cheaper, more flexible systems, particularly using cloud."

"Suppliers like long term business and incumbency, so will not tend to go out of their way to make a switch away from legacy systems easy," he added.

Park said that businesses can legitimately break out of contracts if they wish to change the way they source IT services, but said that the cost of doing so at an early stage of a contract can be prohibitive.

"Over the passing of time a contract becomes cheaper to terminate for reasons of convenience, but paradoxically a business is more likely to become more dependent on those key systems as that time passes. This is often referred to as 'institutional lock in'. It may require a culture shift in an organisation to break that dependency," he said.

"It can be quite hard to break out of IT contracts where a number of different IT service components are bundled together and delivered by a single supplier. However, suppliers can be persuaded to break down the supply of services and allow contracting firms to find an alternative supplier for one or more of the components if they get something in return during renegotiations, such as an extension to their contract for delivering the remaining services," the expert said.

"Firms that have so-called 'tower' arrangements with suppliers - whereby different IT service components, such as email hosting, systems support and applications are treated separately under the terms of a contract - make it easier for themselves to change the suppliers for those individual services if they are not happy with what a single supplier is offering for each component," Park said.

"Companies are moving away from putting all their eggs in one basket when outsourcing the supply of IT services," he added. "There has been an argument that going with a single supplier for delivery of every component IT service over a long period brings convenience and economies of scale to businesses. However, those relationships often end up going stale."

"If entering into long term contracts, businesses need a mechanism to ensure the deal remains competitive on price, as the costs associated with using IT continue to fall all the time. Benchmarking is often used to reduce the cost of supply incrementally during the life of a contract, but this can have a limited effect. A better option for contracting firms can be to commit to reducing unit prices," Park said.

Park was commenting after it was revealed that US federal agencies spent approximately 70% of their IT budgets on legacy systems and 30% on developing new ones. The findings were detailed by the US Government Accountability Office, according to a report by the Business of Federal Technology.

In the financial year 2011 26 agencies spent $79 billion on IT, with $54 billion spent on legacy systems and $25 billion spent on new systems, the Business of Federal Technology report said.

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