In this blog I discuss outsourcing’s two main
evils. The two evils are:
Paying for Nothing
Paying Twice for Something
I provide examples of the traps that firms can
find themselves exposed to in an outsourcing relationship.
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.
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.
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.
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The image shows the
angels on the bottom of La Madonna di
San Sisto, an oil painting by Raphael, 1513.
Thanks go to Mohandass Ayyappath for his
insightful comments and editing.
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ReplyDeleteThis blog is good and have discuss about the two evils. Which are reality and that gives the information of the payment which we are paying sometime for nothing and sometimes twice. That is really wonderful and good blog.