Beware of Minimum Commitments for Outsourcing Contracts

"The inclusion of minimum commitments creates an underlying encumbrance that limits client flexibility," explains Marc Tanowitz, principal at outsourcing consultancy Pace Harmon.

Outsourcing providers have their reasons for asking clients to commit to a certain level of business--some more defensible than others. Minimum commitments can enable vendors to recoup upfront investments, better plan staffing decisions, and ensure a certain level of revenue or profit.

"The suppliers have legitimate concerns," says George Kimball, partner in the San Diego office of law firm Baker & McKenzie's global IT and telecommunications practice. "Pricing and margins may be based upon some assumed combination of skills, facilities and other resources that might be skewed by drastic reductions or 'cherry picking'."

For example, in large infrastructure deals where the providers are compelled to acquire significant client assets, minimum commitments are not uncommon, says Tanowitz. Outsourcing vendors are also more likely to negotiate for strong minimum commitments from a client , says Vashistha. Putting a floor on the minimum amount of business the deal will generate provides some risk mitigation for the provider, should the work prove more difficult or costly than it seemed.

But many of today's outsourcing deals require less significant up-front investment by the vendor, particularly application development and maintenance contracts or newer . Customers who place a bigger premium on flexibility see little to like in minimum commitments clauses.