Mark Bramwell knows when to delegate. As head of IT at the Wellcome Trust, the world’s second largest biomedical research charity with an investment pool of $20 billion, he’s no longer prepared to shoehorn IT procurement into his already packed schedule. Getting the most from the organisation’s IT suppliers is too important a task to be hurried, he argues. And, as the nature of IT contracts changes, it’s increasingly too time-consuming and specialist.

“As we move more and more towards a ‘service provider’ relationship with our suppliers, the nuances involved in negotiating the technical detail of contracts, in measuring the day-to-day performance of suppliers, and in overseeing ongoing project work and delivery, have made IT procurement a bit of an artform,” he says.

For these reasons, last year Bramwell appointed an IT procurement manager, Keith Addis, to assist him in all IT purchasing, negotiation and contracting, which formed part of a radical three-year restructuring of the charity’s IT function, now in its second year. While Bramwell still signs off each and every IT deal that the charity strikes, it is Addis, formerly a technology procurement specialist at the Commonwealth Bank of Australia, who negotiates the structure of those deals on the charity’s behalf, as well as managing ongoing relationships with its suppliers.

Each month, Bramwell and Addis hold supplier performance meetings, where they discuss not only how individual suppliers measure up in terms of service-level agreements and response times, “but also against softer, less tangible targets,” says Bramwell. “I need to know: are they helping us to maximise the value we get from the services they provide? Are they helping us to innovate? Do they come to us with ideas for improvement?” To some vendors, such scrutiny might sound onerous, although Bramwell insists that good performance is regularly recognised and rewarded under this regime, too.

This is a model that CIOs might want to follow in what is widely being declared a “buyer’s market” for IT. It’s no secret, after all, that IT spending has yet to rally after the economic turbulence of recent years. In August 2010, IT market analyst firm Gartner downgraded its IT spending growth prediction for 2010 from 4.1% to a more subdued 2.9%. That points to a continued “low-liquidity” environment, in which many suppliers will be prepared to explore new financing models with customers in order to snag a deal. Perhaps most importantly, however, the way that those deals are packaged is changing, too.

Fresh thinking

With the rise of cloud computing – where software, infrastructure and development platforms are all offered as a hosted, pay-as-you-go service – corporate customers are increasingly on the look-out for viable alternatives to upfront, capital expenditure on IT systems.

“In an uncertain economic environment like this, you can always find a deal,” says David Chan, now director of the Centre for Information Leadership at London’s City University, and formerly head of business systems at the BBC. “The difference is that there’s now a new model of deal for CIOs to negotiate.”

IT used to be a “lumpy investment’, written off over the payback period of a deal, he says. “With cloud, there’s a genuine opportunity to pay according to usage, but that demands different commercial skills and negotiation styles.”

It also requires a change of focus for many IT procurement specialists, says Rose Drolett, head of IT procurement and professional services within fast-food chain McDonald’s European operations. “We used to concentrate on three things: quality, price and service,” she says. “Now those first two are non-negotiable – vendors can’t compete without offering them – so the real emphasis is now on service, not ‘price and device’. And part of that service element should be offering advice and expertise, to help us make the most of what’s on offer.”

Those suppliers who don’t answer growing demand for these kinds of terms could find themselves quickly supplanted by more cloud-savvy rivals, who recognise the need of IT procurement specialists to convert their capital expenditure into ongoing, operational costs, and are structuring deals accordingly.

“One thing I’m noticing among our customer clients is a growing dissatisfaction with the terms and conditions imposed by the large, long-term outsourcing agreements that they signed a few years ago,” says Roger Bickerstaff, joint head of the IT Sector Group at international law firm Bird & Bird. “Right now, many of them are locked into these legacy service arrangements, but as these come up for renewal, I anticipate that many will be looking at them in a fresh light and will want any new deals that they sign to incorporate at least some elements of the per-usage, cloud-style model.”

Time for change

So in light of continued spending constraints, and as more elements of IT are offered under a services model, how should CIOs adapt the way they approach IT procurement?

For a start, they should be seeking out longer-term deals, says Mark O’Conor, a partner in the Technology, Media & Commercial Group at law firm DLA Piper. “IT suppliers are nervous about revenue streams right now and are frequently willing to give discounts in return for three- or even five-year deals,” he says. “There’s a real sense that they’re willing to tolerate thinner margins for the next year or so, in return for a longer-term, guaranteed revenue stream that will enable them to recoup any losses over the life of the contract.”

But here, some caution is required, advises Bramwell of the Wellcome Trust. “We’ve seen a significant shift among suppliers recently, especially in the area of software licensing, and we are frequently offered attractive incentives to sign: if we renew for two years, instead of one, we’ll get 10% off; if we buy three years, we’ll get as much as 50% off,” he says.

“The difficulty there is evaluating where that licence will be in two to three years’ time. Will we still need the application? Will the vendor still be around? There’s a bit of Russian roulette going on among vendors in terms of revenue realisation, and while there are good and attractive deals to be had, you need to be very careful, because a deal that looks great now may be a lot less attractive in 18 months’ time.”

Beyond the small print

The terms and conditions that apply to the “new deal” may also be very different from those that CIOs are accustomed to seeing, advises Bickerstaff of Bird & Bird. “The message that I give to clients is that, with traditional outsourcing arrangements, the service being offered is usually customer-specific and so is the contractual protection, with strong service levels, robust warranties and high limits of [supplier] liability,” he says.

“But with the move to the cloud, companies are typically buying into an arrangement that is much more general, because the provider is able to offer lower prices on the basis that it offers more or less the same service to many different customers. As a result, it’s more difficult to negotiate the terms and conditions. That’s just how the model works.”

In fact, prospective cloud customers looking for enterprise-class terms of service, robust service-level agreements and rock-solid privacy policies may find themselves underwhelmed when they read the small print of cloud contracts, warns Camille Mendler, an analyst with IT market research company the Yankee Group.

In a recent report, Cloud 99.99: The Small Print Exposed, Mendler and her team evaluated the terms and conditions offered by more than 40 leading cloud providers. They found that many cloud contracts contain numerous disclaimers, misleading uptime guarantees, as well as questionable privacy policies and compliance claims.

She suggests cloud providers will need to beef up their offerings, rather than expect prospective clients to water down their requirements. “Cloud service providers better clean up their act fast because major investment decisions hang in the balance,” she says. “Enterprises need transparency, professionalism and certainty to invest in cloud services.”

For non-core business tools or services involving routine, non-sensitive data, it may still make sense for customers to accept looser contract terms in return for lower prices.

A two-way conversation

Mission-critical systems, regulated personal data and sensitive intellectual property, however, continue to pose a problem for many organisations considering cloud adoption – but even here, there’s a growing willingness among the larger, established IT service providers to work with enterprise customers on deals that are tailored to offer a greater degree of comfort.

Cultural change on both sides is what’s needed for such deals to work, says David Rosewell, practice lead for business consulting at Fujitsu. “If customers want to pay according to results – and they increasingly do – that’s something that we can accommodate. Outcome-based agreements have become part of the IT landscape, 
where customers pay for better fraud prevention, for example, or faster call resolution in the contact centre. But for shared risk and return to actually work, there needs to be a lot of trust between the two parties involved,” he says.

That’s a view echoed by Neil Cameron, the former CIO at consumer goods giant Unilever, and before that premium drinks business Diageo. “The best deals I have ever done,” he says, “have been a consequence of sitting down and saying: ‘Come on, how are we going to find some common ground where we can both have a win-win here?’ The reality is that, if you go for the more formal, ‘I’ve got [a business operation], can you reduce the cost of it?’, it’s difficult to find the win-win, because you want to spend less and they want you to spend more. So it’s almost impossible to find that sweet spot.”

And if IT wants to add true value to the organisation that it serves, these negotiations need to involve stakeholders from all parts of the business, says Rose Drolett of McDonald’s. “I never sit down to make a deal without [the relevant] people from other departments in the room with me, because I know they can offer perspectives that lend real weight to the negotiations,” she says.

“At times, you have to be a bit of a salesperson yourself, because you need to pull together a bunch of different dialogues and different opinions. You need to be an influencer and you can’t afford to back away from confrontation. With today’s IT contracts, you’re making strategic decisions, not tactical ones.”

And that assessment of the increasingly strategic nature of IT purchasing will resonate with many CIOs as they look to their key suppliers to provide new, innovative contract models that support their business objectives through these uncertain economic times.

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