For many organisations, outsourcing has been the option of choice for IT cost-efficiency. However, the honeymoon seems to have wound down recently, amid stories of delivery failures or businesses feeling they are overcharged, paying for services not used or not getting services paid for. On the other hand, some outsourcing service providers feel unfairly penalised by their clients’ unreasonable expectations. The problem is often a shortage of specific, measurable information – information that can counteract subjective reactions to a lack of pricing transparency and ambiguous service agreements.
Outsourcing can still make good business sense – the challenge is to know when and under what conditions to do it and which components and at what price to outsource. To make informed decisions, organisations require a broad range of metrics on internal versus external cost comparisons, outsourcing market pricing data, peer performance benchmarks and much more.
“Decisions on outsourcing need to be based on a robust set of metrics.”
Paul Michaels,
Metri Consulting
Unclear outsourced service agreements and costing structures are usually the result of a lack of clarity about the client’s working environment. To build a picture of your business needs – which includes being able to bridge the inevitable gaps between business drivers and technology platforms – is a highly developed skill. Contractual agreements between providers and clients must spell out exactly what levels of service delivery, quality, timeframes, pricing and so on, are to be guaranteed. This level of drill-down detail is vital to ensure the successful long-term management of business expectations and may require independent arbitration when it comes to contract negotiation.
Outsourcing costs are typically based on such elements as: service delivery, quality (24/7, 8/5, onsite, remote, etc), timescale (contract duration), volume (high levels of transaction activity, for example, may be eligible for discounts), and complexity (that is the degree of complexity within your IT environment). To obtain this level of precision with an outsourcer requires some rigorous benchmarking against these five criteria.
Less than transparent
Most elements that make up an outsourcer’s IT service – the various items of hardware, networking and software – can be priced as individual components. However, when it comes to the total package (plus margin), that calculation is often less than transparent. The good news is that outsourcers are increasingly making available their service catalogues which itemise all service components and prices. This helps organisations identify more specifically what they need, understand what they are getting and enables them to do an ‘apples-to-apples’ comparison between providers.
To the outsourcer, the more complex and diverse the client’s IT environment the higher the cost to maintain, and for which a 15% or more premium may be charged. For their part, businesses are often unaware of this complexity and are confused or resentful about such a surcharge. In these cases, outsourcers may actually find it beneficial to their cause to bring in an independent third party who can identify these ‘complexity liabilities’ and help clients work out cost-efficient support options.
On the provider’s side, something like an overstaffed support desk may be incurring unnecessarily high costs which are being passed on to the client. This too can be identified, enabling providers to make the changes needed to ensure a competitive service.
When considering the sourcing issue, the kinds of question most often asked by clients are: Should we outsource or keep our IT in-house?; Are we getting value from our providers?; and How do we negotiate contracts so we know exactly what we’re getting and what it will cost? To answer these with any degree of accuracy requires a forensic evaluation of the client’s and often their service provider’s IT operations. In order to make precise comparisons between internal and external sourcing, the delivery and support costs of discrete services need, if possible, to be dissected. If outsourcing turns out to be the best option, then component costs should be compared against the market norm for best price and best practice, and every service element clearly outlined in the contract.
As the saying goes, the devil is in the detail. For this reason we always advise clients to insist on clear, componentised key performance indicators, and to take the time to walk through every point in the contract with the outsourcer to ensure there are no ambiguities.
Further reading
Optimum Sourcing – Organisations need to take a strategic approach to outsourcing, says global outsourcing advisor TPI.
Out of India – Who’s best placed to exploit the world’s biggest pool of low-cost, highly skilled IT service labour?
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