Outsourcing's Two Evils

In this article by Ernie Zibert, outsourcing’s two main evils are discussed. The two evils are:

Paying for Nothing

Paying Twice for Something

Paying for Nothing

Nobody wants to ‘pay for nothing’. Yet, firms enter into contracts with pricing models that reinforce this evil. For example, many contracts have minimum volume requirements. Once the firm goes below the minimum volume then they might have to pay for a proportion of the cost even though they no longer require that service volume.

High-risk areas where firms can pay for nothing are:

Strategic Services. Examples of strategic services are innovation and architectural services. These offers simply do not warrant pre-payment in any outsourcing relationship. If they are included in your deal then sit down with your provider and ask them to value it and remove that cost from your agreement.

SLAs. Service Level Agreements (SLAs) represent another area where, almost without exception, the firm is paying for nothing. The business need might need 99.9% uptime on servers but the firm is paying for 99.99%. Agreements which automatically/formulaically ratchet up SLAs as part of the yearly review have no value. If these are in your agreement get them removed and save yourself some money.

Development and Test environments – These environments are sometimes not differentiated from the production environments. That is, you are paying the same service cost for a development/test environment as you are for a production environment. Even when the cost of supporting these dev/test environments is differentiated and less, they have the same level of SLAs as production servers. If this is in your agreement get it removed and save your firm money.

Pre-paid Services. The golden rule of any effective outsourcing relationship is not to pre-pay for any Services. The worst offender tends to be paying for Professional Services. Simply avoid this. If the provider tempts you with a discount then negotiate a rate discount following a review of the annual spend for professional services. This way, the firm gets a discount on actual costs incurred and the provider bases the discount on actual revenue and not smoke and mirrors.

Messaging Services. Many Service Agreements require the customer/firm to pay by the Active Directory (AD) account. When staff leave they are not removed from the AD and when groups are added the costs for the Service keep going north. To alleviate this cost inflation, ensure you have a bullet-proof policy to clean up AD accounts when staff leave the firm. Also, ensure you have a policy for the creation of distribution lists or generic accounts or apply a different and cheaper price for these accounts. This same principle applies to all billable objects in your Services Agreement.

The ‘paying for nothing’ pitfall in many outsourcing agreements has been recognised by most Vendor Managers and CIOs. XaaS solutions (e.g., IaaS, SaaS) alleviate some cost traps, but not all. For example, many SaaS providers require you pay by the account. On the surface this is quite fair and reasonable. It is aligned with the ‘pay for what you eat’ model. The problem resides in the fact that with this cost structure the providers are not incented to inform you that accounts have not been used or that you are creating billable accounts that serve no value. So remain vigilant and ensure you have the processes in place to mitigate this cost inflation.

Paying Twice for Something

Nobody wants to ‘pay twice for something’. Yet, firms continue to enter into contracts that expose them to this evil.

High-risk areas where firms can pay twice for the same thing are:

Operating Systems. Many outsourcing relationships include an equipment refresh service. Most providers include the Operating System (OS) in the price of the refreshed kit (laptops, PCs, servers), which in turn is bundled in the monthly managed service fee. Yet, neither providers nor firms re-use the OS, despite the fact that most OS licenses are perpetual. So if you have a refresh service in your agreement, check that it uses existing OS and that you are not paying for a second OS.

Software Maintenance/Extended Warranty. Many outsourcing relationships include the supply of software by the provider as part of the Service offering. Yet many firms do not terminate their existing software maintenance contracts when they enter into a managed service agreement. Ask your provider to take over your maintenance and any fees you have pre-paid and reduce the cost of your service. The same principle applies to all your extended warranty on items which are managed by your service provider, including your servers. As a rule, never enter into extended warranties in a managed services environment.

Desktop refresh. Many outsourcing relationships include an equipment refresh service. Ensure that you have a clear policy of decommissioning refreshed assets. Don’t leave them in drawers/cupboards/filling cabinets and furthermore reuse the office application (e.g., MS Word, MS Excel) licenses. Otherwise, your provider will rightly charge you twice for the one staff member. Check that your ratio of billable units to headcount is 1.

Server monitoring. Many outsourcing relationships include a monitoring service. The provider will use their monitoring agents. Ensure that you have the minimum number of agents on your servers and convey this policy to your service provider. Ideally, if you have agents installed sell them to your provider.

Backup strategy. Many outsourcing relationships include a Backup Service. This is has evolved to become the most apparent area of duplicate cost for the firm. Many providers will simply execute the firms existing backup strategy. And good luck to them. Most firms have a backup policy which is outrageously costly and silly. For example, the firm performs snapshots, mirroring, backup to tape (daily, weekly. monthly, quarterly, annually, etc), and off-site backup storage. Multiple backups that afford the firm no additional risk mitigation are simply the firm paying twice for the same thing. Bottom line is clean up your backup strategy and ensure that you ask your provider for the most efficacious backup solution for your firm. Ensure that your backup strategy aligns with your business needs and not simply time-honoured IT tradition. ( see http://en.wikipedia.org/wiki/Recovery_point_objective)

The moral is to ensure you are clear on what is included in your outsourcing deal. Then and most importantly, cancel your overlapping agreements. In this way, you will extract more value from your outsourcing agreement. Avoiding these outsourcing evils is of benefit to both the firm and provider. It ensures the long-term health of the relationship. There are numerous other areas where firms are exposed to outsourcing's twin evils. To get a health check of your outsourcing agreement, see the contact details below.