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IT contract restructuring soars in first quarter

4/30/2012

The first quarter of 2012 saw a steep fall-off in the number of new IT contracts inked, but it also saw a dramatic increase in contract restructuring, according to the recently released ISG Global TPI Index.

The index, which considers contracts worth $25 million or more, found the total value of outsourcing contracts for the first quarter was $18.7 billion, which represents a 22 percent year-over-year decline and a 35 percent decline from the last quarter of 2011.

Despite this sharp contraction in new contracts, restructuring activity - such as contract renegotiation or renewal - was up 82 percent over the first quarter of 2011, according to the index.

The rise in restructuring activity can be attributed to shorter average contract terms. ISG figures show contracts expiring at twice the rate they were five years ago.

Renegotiation presents opportunities for both parties to a contract, ISG noted. The provider can take the opportunity to introduce additional services, for example, while the client can revisit pricing. In a typical renegotiation, the incumbent provider will retain 80 percent of the scope of the contract, on average.

Despite the high number of early year renegotiations in 2012, consultant Gregg Spivack wrote in a recent post for Spend Matters that the end of a tech company's fiscal year is often the best time to renegotiate contracts.