In the last post of this series (Part 1), we introduced the idea that IT service contracts were more difficult to understand and talked about why outsourcing costs are such a critical part of today’s IT strategy. In this post, we’ll take a deeper look at why contracts have become more complicated and what that increased complexity means for your organization.
What’s driving increased contract complexity?
Today, unit price points can range from fifty to well over a hundred individual items and contracts are often extremely difficult to understand. This can make deciphering contracts and evaluating their potential impact on performance and business challenging, but what has caused contracts to become more complex?
Multi-tenant environments make pricing less clear
One of the major shifts driving the change is the popularity of multi-tenant environments. This trend has many technical and operational benefits for IT departments, and can even lead to better pricing terms, but it also often makes the IT price comparison and variable management more complicated. As IT services shift from dedicated infrastructure, computing, and storage to shared resources, pricing models have drastically changed.
Generation one contracts primarily dealt with dedicated infrastructure, which provided straightforward price points. Now for example, cabinets and top-of-rack costs are apportioned to multiple VMs and images, spreading out the cost and making them harder to understand. Tape operations are rapidly being replaced by VTLs, with infrastructure costs often shared across organizations or between departments.
In first generation IT service contracts, clients could much more easily understand the effects that changes in a technical environment would have on costs. With resources shared between many organizations, this becomes much more difficult to predict. It also makes finding the optimal price to performance ratio for your organization challenging. Pricing models have been adapted to reflect changing service models, and companies must stay proactive to understand how this change will affect them.
Today, to reflect the implications of multi-tenant environments and the commoditization of IT services, pricing is affected by a range of variables, including:
Fixed Cost Elements
Variable Cost Elements
Tiers of Service per Element
Degree of Standardization
Service delivery partners aggregate prices
Price aggregation might seem like it would make IT outsourcing agreements simpler, but it actually has the opposite effect. Because pricing has become more complex thanks to multi-tenant environments and other variables, aggregation simply serves to confuse the issue even further. Hiding several variables behind a single price point makes benchmarking and market price analysis much more difficult. Clients simply have to work harder to find out what they are actually getting. Motives for doing this are also usually self-serving for service partners, as price aggregation reduces areas of contention with a client when prices increase.
In today’s IT services market, companies must have the right knowledge and guidance to understand how their outsourcing agreements will impact their business. In the final post of this series we will further explore IT outsourcing agreements and pricing by taking a closer look at how companies can manage the increased complexity of IT service contracts and develop strategies to ensure that they reach an agreement that meets their business needs.
WGroup’s consultants have decades of experience navigating the most complex outsourcing agreements. To learn more about WGroup’s sourcing advisory services and how we can help you turn IT outsourcing into a strategic business enabler, visit our Services Page.
This is the first of a multi-part series on how the increasing complexity of IT outsourcing engagements is creating the need for IT leaders and sourcing professionals to understand and work with a new generation of pricing models. Visit The Journalto stay up to date with strategic sourcing and IT leadership topics.
As IT services evolve and the wealth of service offerings increases, IT outsourcing agreements are becoming increasingly complex and difficult to manage for many companies. This can often lead to organizations paying too much for their IT services or not getting the service they need. Having an effective pricing strategy to manage outsourcing agreements is a critical component of IT success. In this post, we’ll discuss the trend of increasingly complex agreements and what it means for your business.
IT outsourcing agreements are growing in complexity
Today’s outsourcing agreements are very different from those of the previous generation. As dedicated infrastructures make way for complicated multi-tenant environments, many organizations are struggling to effectively manage their IT contracts and pricing strategies. It is not uncommon for a current generation contract to include 50 to 100 — or more — individual price points. New pricing structures can take into account various tiers of service for each scope element, aggregate price points, organization financial structure, and the degree of technology standardization. Relating this complex array of factors to their potential impact on financial performance and forming an effective cost/benefit analysis can be challenging.
This trend is further driven by the increased use of multi-sourcing strategies to leverage best-in-class providers for different elements. Organizations must now manage an increasing number of contracts, with varying pricing structures that can conflict with overall IT planning targets and business requirements. This adds additional layers of technology complexity and new requirements for outsourcing pricing strategies and requires a greater management focus.
IT outsourcing pricing constructs are an integral part of IT strategy
Although price should not be the primary driver of IT strategy, it is a fundamental component of it. The IT department strives to deliver the most effective applications and services to the end user at the best possible cost. Understanding outsourcing agreements and pricing best practices is a critical part of overall IT strategy. Building key metrics into SLAs, regularly evaluating performance, and having a clear comprehension of every service being delivered are all key factors in the process. This allows business to better understand the dynamics of price and how pricing can impact financial and operational performance. It also allows executives to align IT objectives with business goals and achieve a more harmonious balance between transparency and complexity. Organizations must strive to gain perspective on the changing pricing structures and use that understanding to deliver services and value to the end user more cost effectively.
In the next post of this series we will further explore IT outsourcing agreements and pricing strategy by taking a closer look at the root causes driving increased complexity and how they can affect your organization. Visit The Journalto learn more.
With the TBM conference coming up in the last week of October, CIOs have more reason than ever to consider how new technology can help them better manage their departments and align their goals with the business goals of their organizations. Recent statistics released by CIO Magazine show that an incredible 54% of business executives viewed the IT department as “an obstacle to their mission” and 47% said the CIO was fighting a “turf war” with at least one other C-level executive. Clearly many IT leaders are struggling to coordinate with the business at large, leading to disconnected priorities, inefficiency, and missed opportunities. We think it’s time to not only repair this disconnect, but leapfrog over it into a rethinking of IT. The TBM conference is one way to start accumulating this kind of thinking. (And contacting WGroup for a scan of your opportunities is another.)
What is TBM?
TBM, or technology business management, is a relatively new category of SaaS solutions designed for CIOs and IT departments to help them manage their businesses. These tools allow IT Leaders to run their businesses with the accuracy, transparency, and efficiency that modern solutions have afforded their peers, allowing them to more accurately justify costs, optimize efficiency, and align with business goals.
Why should TBM be on my priority list?
1. It is a critical enabler to running IT “as a business.”
IT has unique needs and goals that are not met by generic business management tools. TBM offerings seek to fill this gap by providing purpose-built solutions designed specifically to help IT Leaders run their business. This allows them to move from traditional, often ineffective options, such as spreadsheets. These tools recognize the core truth that IT, like other departments, needs to manage and report costs, performance, and future projects. In order to do this effectively, IT Leaders need solutions that take into account the unique metrics, practices, and challenges of IT. TBM solutions allow IT Leaders to oversee vendors, manage benchmarks, and track project costs to ensure that their department is run efficiently.
2. It is essential in justifying IT spending to the business.
Spending is often one of the greatest areas of contention the organization at-large will have with the IT leader. And because many of the benefits of investment in IT can seem intangible to the average user, many business leaders are left wondering exactly where all that money is going. TBM solutions give IT Leaders the power to more easily show the organization exactly how resources are being spent, to prove that they are having measurable impacts on performance. This is essential in providing the IT leader with the tools they need to maintain their current budget, or even ask for more funding.
3. It facilitates the development of stronger partnerships with the business.
Today, IT is no longer a department with a supporting role, it is often a major source of revenue and competitive advantage. IT enables the primary channels for interfacing with customers, and holds responsibility for boosting productivity within the organization. As the IT department becomes an ever more integral part of daily business functions, it is critical that IT leaders increase their efforts to coordinate their own goals with the goals of the business at large. TBM solutions allow for greater transparency in the IT organization, allowing IT leaders to more effectively align their priorities with those of their business partners and giving them the tools they need to work together to achieve broad business objectives.
If you’d like to learn more about the benefits of TBM, be sure to check out the 2015 TBM Conference October 26 to 29 at the Hyatt Regency in Chicago.
To learn more about WGroup’s advisory services for strategic IT transformation, visit our services page.
Providers of outsourced services love to talk about how much money they will save you on salaries and benefits, and they should, considering how significant those expenses can be for most organizations. But unless you understand and quantify—and then negotiate for—the improved business outcomes that come with outsourcing, you could easily find that your bottom line was better served by permanent employees providing those services.
In the case of IT services, salaries are easy to quantify, the business value of those services less so. So you need to approach the issue of outsourcing IT services very carefully, making sure that your corporate priorities are served, and understanding how the value of IT services can change with outsourcing.
Most importantly, you should view outsourcing as an opportunity to increase the quality of IT services across your business. This means choosing a program lead who has a deep understanding and appreciation of IT services’ benefits and potential. That doesn’t mean, however, that the most technically proficient IT manager would be your best choice. You need someone who can also manage customer relationships, and who understands the outcomes that your business wants. The lead must be an outstanding communicator with potential IT services providers. Choose someone who can enable the provider to understand how the IT services align to business outcomes, and who will manage the provider as a strategy partner – not a transactional supplier.
And what are those levels? To begin, consider what services you’re currently overpaying and underpaying for. Many businesses are overpaying for in-house IT administration and support functions. Think also in terms of IT services on an as-needed basis to lower costs, get a higher level of expertise, and 24/7/365 coverage. Paying for performance also has multiple advantages over paying for specific services.
On a more subtle level, consider the costs that many outsourced providers bring along with them. Will they be constantly upselling (does the engagement team carry a sales quota or a customer satisfaction objective)? What are your costs for travel and training on your systems? Employee relationships and corporate morale will benefit if you retain as much of your IT staff as possible and then train them to provide your most valuable IT services. Consider the value of continuity to your IT services and staff them accordingly.
Regardless of the service provider’s security capabilities, their employees simply do not have the inherent incentives to keep your data secure that your employees have. So craft an SLA that minimizes the opportunities for the vendor to compromise your data, even inadvertently.
Two final points: First, be sure that your providers understand what they are doing right and that you appreciate it. Anyone in a service-providing role is naturally tuned to providing more of what their clients value most. Second, be tough. Insist on the business outcomes that drove you to outsource in the first place.
When going to market for services and engaging new service providers there is tendency to focus on value and often times supplier transition is not considered as important as price, performance or added value. Picking a supplier that has a proven transition performance record as well as assigning an experienced IT transition project management team is critical to service transition and service delivery success.
Here are the Top 5 Service Transition Risks and Mitigation Strategies:
1. Risk of: Schedule Delays
Schedule delays drive up transition costs and expected benefit realization is delayed.
Mitigation Strategy: Develop a transition strategy that outlines a stepwise schedule approach that tests transition readiness increasing scope and complexity as specific milestone criteria are met.
2. Risk of: Service Costs
Service costs increase after contract due to “hidden service demand”
Mitigation Strategy: Employ a rigorous due diligence approach to understand current demand drivers and service management requirements. This approach aligns in-scope baseline costs against time and material out of scope costs and accurately forecasts future service costs ensuring that accurate baselines are established with the service provider during contract negotiations.
3. Risk of: High Demand Skill Sets
High demand skill sets that are difficult to source in the market can impact service providers’ ability to staff.
Mitigation Strategy: Evaluate the relative complexity of the current and future business processes to identify the specialized resources needed to support day-to-day operations. Make specific HR adjustments to mitigate the impact of critical resources leaving the organization (if applicable).
4. Risk of: Quality of Service (QOS) Degradation
Quality of Service (QOS) degradation after contract execution
Mitigation Strategy:Establish service level management best practices that incent the most important service objectives for the business. Activate governance in the first month during transition and establish governance procedures. This approach minimizes QOS degradation and provides contract mechanisms for financial relief.
5. Risk of: Managing Service Provider Effectiveness
IT and the VMO struggles to manage service provider effectiveness and is unable to remediate service provider performance
Mitigation Strategy: Build an effective contract governance model that will ensure that:
IT retains adequate control of their IT services
Responsibility and commitment are accepted values between the service provider and client
Performance and improvements are continually measured in quantity and quality
Both partners strive to enhance efficiency and excellence
Partners cultivate a stable and trustful relationship
Each of these risks should be addressed as part of the service requirements when sourcing services and should be factored in as part of the supplier selection process. Mitigating transition delays is essential in integrating a new supplier as well as minimizing service interruptions that can be caused by a poorly planned transition.