Beware of Minimum Commitments for Outsourcing Contracts

Minimum commitments--which can take many forms, including revenue, service volume, or full-time employee levels--oblige an IT services buyer to consume no less than a certain level of business with the vendor, either annually or over the life of the contract. Such clauses are typically contained in a special section of the master service agreement or in the contract's pricing schedule. (See also: .)

For a time, IT executives were all too happy to sign on the dotted line, deeming minimum commitments a reasonable demand. Fast forward to today and--while IT service providers of all stripes continue to press for minimum commitments--savvy customers are pushing back.

"There is no benefit to the customer from a minimum volume clause," says Atul Vashistha, chairman of offshore outsourcing consultancy neoIT.

Indeed, minimum requirements deter clients from even when the current vendor is not performing. They also make it difficult to respond to major events like business downturns, changes in strategy, and mergers and acquisitions.