Many companies that have outsourced their IT are dissatisfied with the service provided by outsourcers, but few are likely to stop the practice altogether, opting instead to renegotiate current contracts.

Simon Pollard, managing director of Asia Pacific operations for Technology Partners International (TPI), a major IT outsourcing firm, told a conference on outsourcing conducted by the Institute for International Research (IIR) last week that most deals were renegotiated during the initial term, but only about 20 percent switch suppliers and even fewer take IT back in-house.

According to Pollard, major problems with initial outsourcing contracts include poorly defined service level agreements and a mismatch in financial objectives. He said renegotiation should be recognised as a normal and necessary readjustment to changing conditions in a dynamic marketplace.

A recent survey by analyst group IDC has revealed that only half the companies that have outsourced their IT functions are satisfied with the service enough to continue the current contract. However, only 13 percent have indicated they will terminate the contract, and less than five percent indicated they would be bringing the IT back in house, with the rest indicating a renegotiation of the contract is in the pipeline.

The IDC analyst who compiled the report, Kathy Benson, told ZDNet Australia that despite the relatively high levels of dissatisfaction, most companies would continue to outsource their IT.

-Of the customers that we surveyed five percent indicated they would terminate the contract and take it back in house," said Benson. -My belief is though, realistically, once they start looking at what's required to do that, that percentage could drop even more. What I think will happen is that they'll continue to outsource their IT but they might decide to bring portions of it back in house."

The IDC survey revealed key areas where outsourcers performed poorly were also the ones customers valued most highly, such as communication and losing knowledge to the outsourcer.

-When the contract is signed a lot of the customers employees are transferred over to the provider," said Benson, adding it is common practice in large outsourcing deals. -So the customers feel they are losing that knowledge or skill, and they don't feel that once the employee has gone over to the provider that its' being transferred back to them."

This experience is borne out by ZDNet Australia reader, who wishes to remain anonymous. He told of his experience at a large NSW Government department when they outsourced their data centre and communications to Fujitsu in 1998, in a deal worth AU$25 million. He claimed the transfer of people from the department to Fujitsu was a major reason for problems encountered in the outsourcing arrangement.

-They took some staff out of the organisation and then used those staff to deal with people who they knew within the organisation. They had already established friendships, so there was no real desire to be anything but buddy-buddy and too many things slipped through the cracks," he said.

He found communication to be a major issue, saying that when he called the 24-hour desk to inform them of a problem with the network, he would get the response -I'm just an operator, all our network guys aren't here." Fujitsu responded to queries by saying they are bound by confidentiality agreements and cannot comment independently on customer sites.

The department eventually decided to keep the data system management outsourced with Fujitsu, but bought the communications side back in-house, according to our source. According to Pollard, this breaking up of sole-source contracts is becoming increasingly common. -A lot of companies are now going on a best-of-breed basis," he said at IIR. -There aren't many mega-deals anymore."

Pollard said that a critical success factor in renegotiating outsourcing contracts was for the customer to have clearly defined objectives, a sentiment mirrored by Benson.

-The first thing a customer needs to determine is what their goals and objectives are, why are they outsourcing," she said. -A lot of the early ones that we saw, some of the reasons why they weren't successful is that the customer had the reason for doing it of -We have a problem with our IT, we're going to hand it over to you and you'll fix it for me."

She said customers were a lot smarter in their outsourcing contracts this time round, with many using a third party to negotiate the contract. She also said they are a lot more specific in what they ask for from a service level agreement than they were before.

Copyright © 2009 CBS Interactive, a CBS Company. All Rights Reserved.
ZDNET is a registered service mark of CBS Interactive. ZDNET Logo is a service mark of CBS Interactive.