Careful Scrutiny Required

Whatever the deal on offer, analysts say CIOs should proceed with caution. In most self-funding deals the main issue for CIOs to consider is how to benchmark the project, Jester maintains. CIOs must start with a good base benchmark and then periodically benchmark again - say once every 12 months. And they also need to include the cost of this benchmarking in the calculations of the value to be derived from any deal, particularly given the complexity of the task.

"Benchmarking is not trivial," he says. "More importantly, I think as you go along, although you can measure apples against apples, the business that you're measuring is changing. In 12 months a lot changes. In 24 months nearly everything changes. And you could by clever accounting come up with a benchmark that still measures the old apples versus the new apples. But what if you're not selling apples any more, but are now a multi-fruitorium, and apples are a tiny part of your business? That's probably the real issue with that kind of measure."

Jester says the best way to get around such difficulties is to sit down with the vendor and work together on measures to reward actual performance. But he warns that along with business process outsourcing, build/operate/transfer models and joint ventures, which are also being used more frequently to minimise the cost burden and share the risk, all these deals deserve close scrutiny before you sign on the bottom line.

"It pays to give these very careful attention, because usually they're not as good as they seem, and most of the service providers I talk to are very happy to do them in their sales pitches and their point presentations, but when it comes down to the nitty-gritty, most people eventually sign a more or less traditional deal," he says.

"The downsides have to be considered. But the other piece is that the providers are all willing to negotiate at the moment: it's a buyer's market and they are all willing to sit down and say: 'What's your problem, how can we help', and so on.

"They are all prepared to talk, but it is still very complicated," he says.

SIDEBAR: Let's Make a Deal

Vendors have been coming up with a range of creative ways for funding IT projects recently, for instance by offering pre-packaged environments customers can buy into as a service. Janet Matton, IBM director of e-business on demand for the global services operation, says IBM recently went one further, becoming a business partner to a customer by offering to build an application, package it up and sell it back to that company on a per transaction basis.

"This company wants to launch a new business offering into the marketplace, but they're not sure what their minimum/maximum take-up rate will be, so together with the business partner, we've come up with a model that says we'll invest a certain amount of money in an environment in the application and bill that back to you over time, on a per output basis, if you like. So if you get X number of customers we will bill you X dollars per customer," Matton says.

In fact IBM has always offered global financing that packages up development and provisioning of applications and hardware through a range of lease options. Matton says these deals are increasingly popular.

"I guess the other model that we're really working with customers on is taking what they see as current sunc costs and freeing up money from that sunc cost to fund new developments or new projects or new applications," she says. "There are many, many organisations today that have a multiplicity of systems and applications and many of those systems are not running at full capacity. And through a combination of consolidation, management tools, skills, expertise and the like, there are programs and capabilities that we can take customers through where they can actually get money back in their business, free up the ongoing management costs, and then reinvest those in new projects," she says.

Other vendors are also keen to offer customers flexible ways of paying for systems. For instance last year Computer Associates introduced FlexSelect - a month-to-month licensing model that lets customers pay for software in chunks and makes it easier to justify software purchases and measure ROI.