In a tight economic environment, CIOs and their IT teams are under pressure to justify the cost and effectiveness of their organisation’s IT equipment over time.
But often, they don’t really know if their systems are performing as well as they can, or how the total cost of ownership of their IT infrastructure compares to other solutions being offered in the market.
CIO talks to Eugene Talasch, principal at ET Business Solutions, about how to measure IT spend, negotiate lower costs, and ensure value is being maintained in long term technology contracts.
CIO: How should organisations measure their IT performance – spend and quality of service delivery, and how should they measure IT spend and compare it against their market peers?
The objective and high-level process for organisations to measure their IT performance is to understand the business objectives for IT delivery. To ensure IT delivers what the business expects, it needs to implement an ‘internal IT metrics program’ – capturing, analysing and distilling contextualised and standardised information for ways to meet and improve IT delivery for the organisation.
A most important and overlooked fact is that metrics must be comparable; otherwise the ‘internal IT metrics program’ is a total waste of money and time. The saying, “You cannot measure what you cannot define and compare” really applies in this case.
Once IT metrics have been captured to form a baseline, it is important to benchmark to ensure that organisations are continually aware of best practice metrics, trends and processes relative to their specific market meaning their organisation remains competitive and relevant.
CIO: What mechanisms should they be using to negotiate a lower cost and/or increase the value garnered from existing IT contracts?
Benchmarking. It has all too often become abundantly clear to us that customers do not have quantifiable evidence required to negotiate lower price/increased value from existing IT contracts. Equally, if a vendor willingly agrees to participate in a benchmark, it shows the customer that they value the relationship with their customer.
A customer we met with recently said: “We have a contract worth (only) $4 million, we would be negligent in not undertaking this due diligence exercise.”
Regardless of the scale of the contract or the size of the organisation, benchmarking can benefit all who seek out value for money.
CIO: What are the main impediments to understanding the true cost of IT?
Organisational culture. This is the main impediment to understanding the true cost of IT. If IT measurement isn’t adopted as part of the organisational culture, then there is very little one can do to understand the cost of IT and more importantly, the underpinning value IT brings to the organisation.
IT measurement must be systemic throughout the organisation, driven from the top down. It must be embedded into the organisational culture and measured consistently across the entire organisation.
CIO: How do organisations ensure value is being maintained year-on-year for long-term contracts? For instance, how do they maintain market competitiveness and prove increased efficiencies over the period of the contract?
Benchmarking clauses ensure year-on-year value over the long-term. This isn’t to say that an organisation is required to benchmark every year, as prices don’t fluctuate significantly year-on-year for most ITSM areas.
It is common to see outsourcing contracts with terms of 5-7 years. At the minimum, we would recommend inserting benchmarking clauses in year 3 and year 5, as market prices would have fluctuated sufficiently to warrant a comparison of pricing and services.
Furthermore, benchmarks performed in the proper way highlight trends and developments in the outsourcing market, improvements to increase productivity, improve service and minimise prices and costs.
Another important time to benchmark is when the parties are discussing whether to extend the contract or go back to the market. Benchmarks are the perfect tool to test the market and provide current charges for a variety of services without the cost of a typically very expensive RFP.
CIO: How do organisations best determine if they are really getting value for money as they move more and more services to the cloud?
The nature of IT is to continually innovate product suites and service portfolios. It therefore becomes necessary to offer products and consultative services that can measure value for money accordingly.
ETBS has a cloud subject matter expert who focuses entirely on understanding cloud-related activities and trends as well as developing tools which break down cloud ‘pay-as-you-go’ pricing constructs into comparative data sets our customers can easily view. They can then determine whether value for money is actually being achieved or could be sourced elsewhere.
CIO: What are the implications of a benchmark clause in an IT services contract?
Most, if not all, outsourcing contracts contain a benchmarking clause. A benchmarking clause is a tool that can be used by either client and/or vendor to measure the ‘performance’ of an outsourcing contract.
A benchmarking clause allows the parties to re-visit the contract and provides an opportunity to re-state customer business outcomes (if outsourced) as they may have changed since the initial signing of the contract with the current state-of-play.
It also allows the parties to identify what changes are required to the current state-of-play (if any) and close this gap, once again ensuring that vendor service delivery provides value to the customer.
A benchmarking clause also allows an organisation to review whether the prices charged and currently in place are marketing compliant and competitive; if services have been delivered as promised, and if process improvements and value have been delivered as per the contract.
CIO: Under what circumstances do you think benchmarking is a valid measure of performance for both the customer and the vendor?
Benchmarking should be highly flexible for both customer and vendor as it can be performed in a variety of scenarios, for example, as a one-time engagement or as a continual process.
Benchmarking is highly applicable during three different phases over the course of a contract term:
- 1. As a baseline measure prior to any contract being signed to ensure the customer is provided market competitive prices and delivery models/targets from day one.
- 2. Mid-contract point via the benchmarking clause to ensure pricing remains aligned to the market and to identify improvements in the quality of service delivery performance and lastly; this is typically from Year 3 onwards and then repeated every 2 years or so.
- 3. Depending on the term of the contract, anywhere between 6-18 months prior to contract expiration and renegotiation of the contract or going to market with an RFP/RFT. At each phase, benchmarking allows the parties to promote good business acumen and goodwill for the betterment of the contract.