Many factors can impact the financial case for IT outsourcing, from general market conditions to specific IT service provider strategies. CIOs can control only a few of them. Yet, too often those issues that the IT organization does has influence over are glossed over or ignored when building the outsourcing business case and negotiating the deal.
"IT leaders are often well-versed in the latest technologies and service provider offerings," says Shaun Daly, founding principal of outsourcing consultancy Sourcing Advisory Services. "But many times [need help] crafting a relationship that works over the longer term, where innovation, performance and technology criteria are constantly changing and must stay in balance. A solid understanding of the key factors that influence price and the levers available to enhance the outcome and achieve the business objectives is what makes this possible."
The are five critical, but often overlooked, levers that can impact outsourcing costs--and the real value of the relationship over time.
1. Scope and Scale The most significant cost driver in any IT outsourcing deal is the scope and scale of the services provided--scope meaning the type of work to be performed and scale meaning the volume of the work to be performed. The best situation from the service provider is a deal that has a narrow, well-defined scope of work in a large-scale volume setting.
"Too often clients will predetermine and narrow the scope and scale without a full discussion of pros and cons with advisors and solution feedback from service providers," says Daly. As an alternative, outsourcing buyers can enter the RFP process with a broad definition of scope and scale with the intention to winnow them down throughout the RFP and negotiation process.
2. Service Levels IT service providers build their outsourcing arrangements based on prescribed service-level agreements, the complexity of the customers' operating environment, and the degree of change required. Higher levels of service, for example, may require the provider to upgrade or provide redundant infrastructure, increase testing, or hire more support staff. Customers with unique operating environments or requirements will pay a premium.
IT leaders need to understand both their own and their providers motivations around service levels and their impact on cost. "One of the primary objectives of the negotiations [should be] to determine the sensitivity of service-level adjustments on the quality of service and pricing," says Daly.
3. The Value of a Healthy Relationship "Historically, clients have had a myopic focus on cost reductions and securing the 'best deal' without fully appreciating the consequences on service delivery and business user satisfaction," says Daly. "Conversely, service providers have become experts at using change control [later on] to recover the margin that may have been negotiated away during final negotiations."
A more transparent and balanced approach to building and negotiating an outsourcing relationship will lead to a healthier long-term relationship--with few financial surprises. Communicating more often and more openly with the outsourcers in the evaluation and constructive process increases trust, mitigates risk, and ultimately lowers the cost of the deal, says Daly.
A clear governance model, documented processes and a demonstrated commitment to working together will help set the right tone. If client governance wanes over time, service providers can sweep in to generate more revenues via change order and new services. That value leakage can be costly, says Daly. "While this potential issue is not evident in most sourcing business cases, requirements should be included in RFPs to reduce the likelihood and impact of value leakage. Clients need to maintain a strong governance organization and manage the contract well to fully maximize these benefits over the term."
4. Global Delivery Models Outsourcing clients may have legal, contractual or regulatory concerns that prevent the use of offshore outsourcing outright. But, says Daly "it is wise to examine internal assumptions and openly explore solutions other businesses have implemented. Labor arbitrage has been a important driver of the growth in outsourcing for a long time, but there are now more geographic options than ever, providing clients with the ability to diversify delivery locations and mitigate risk."
5. Process Improvement Labor costs aren't the only way to cut IT costs by outsourcing. Maximizing process efficiencies are equally important. Yet outsourcing customers and providers have only just begun to reap these potential savings. Embracing stand-alone service integration and management offerings is one route to take. Clients should also be more receptive as service providers seek to automate as many user interactions, leverage common tools and processes to capitalize on investments and drive down costs, says Daly.
Stephanie Overby is regular contributor to CIO.com's IT Outsourcing section.
Read more about outsourcing in CIO's Outsourcing Drilldown.
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