IT Outsourcing: What You Don’t Know, Might Be Costing You

For many companies, the management of IT outsourcing is becoming increasingly complicated, problematic – and expensive. While there’s no question that outsourcing can help fill gaps in IT department services, there’s also a growing consensus that confusion regarding negotiated terms and conditions, lack of transparency, and faulty integration of cost and utilisation reporting can cause the vendor relationship to spiral out of control.

Despite best efforts to get their arms around technology consulting, project labor and support services, many CIOs now can’t help but look at their provider’s monthly bill and wonder:

  • Are we being as efficient as possible with this contract?
  • Do we know if this contract is still cost-effective?
  • Can we be sure we are being billed at the correct rate?
  • How many resources have been consumed?
  • Have the services we’re paying for actually been performed?

Of course, all of these are legitimate questions, and more and more companies are finding that it pays to track down the answers. In fact, I have found that more than 30 percent of mycustomer base is losing valuable resources because of ineffective IT outsourcing contract management.

Granted, traditional contract pricing typically includes a fixed fee for a contracted volume of services, with variation on fees for volumes above or below those target thresholds. (Additional resources required are known as “ARC’s.” Credits for reductions in services provided or resources consumed are called “RRC’s.”)

This ARC/RRC methodology was designed to account for service/resource fluctuations, but when customers lack visibility into the processes that determine ARC’s and RRC’s, they lose opportunities to identify how best to utilise the services the vendor provides.

What’s more, as IT outsourcing contracts continue to grow increasingly complex, this level of uncertainty is becoming much more than a mere annoyance. It’s costly, and a lack of definition and understanding can lead to even bigger headaches down the road.

What are vendors doing to remedy these problems? Not much, apparently. And that means many customers are left feeling as though their IT outsourcers are leaving them in the dark.

For example, I have seen several cases where the original cost model based on the outsourcer invoice data did not include details on the operational environment. As a result, one of our customers who had outsourced a considerable amount of services was unable to conduct a detailed analysis on how the environment was being used and where to look for cost saving and optimisation opportunities.

In addition, some vendors are notorious for sending customer’s billing data in two separate reports: one from finance, which accounts for base contract service levels and ARC/RRC adjustments; the other from project managers, outlining server utilisation and other operational metrics.

This siloed reporting structure leaves customers hamstrung and creates ambiguity that inevitably ends up favoring the vendor. Why? Because without meaningful integration of the data from these two reports, they don’t have a simple way to connect the dots and make meaningful business decisions.

Is there anything your company can do to reverse this trend? What steps can you take to more effectively manage your IT outsourcing contracts? For starters, look for ways to marry technology outsourcing cost data with information about utilisation. This type of integrated analysis can help you:

  • Optimise hardware utilisation: Precise information about the server environment, including utilisation metrics and detail on how servers are provisioned, provides a better understanding of the resources consumed and the cost to consume them. Armed with these insights, you’ll improve your view of what resources should be optimised – and which ones can be deferred
  • Understand the TCO of your IT service portfolio: Determine total cost, cost drivers and business consumption of your IT service provider. Retained costs and other internal costs that fall outside the vendor contract should also be part of this analysis.
  • Shift IT spend to “Change the Business” initiatives: Identify trends that can lead to further innovation, cost savings, process efficiencies, and competitive advantage.
  • Renegotiate existing contracts: Contracts often contain clauses that allow you to renegotiate if your requirements have changed and specific services aren’t being utilised.
  • Uncover immediate cost savings: Analysis of integrated metrics can identify “quick wins”, such as moving provisioned services to a lower tier of service (gold to bronze, e.g.)

Remember: When your business depends on IT outsourcing, it’s imperative that you understand how to derive optimal value from your vendor contract. Once you start combining IT operational and financial data, you’ll gain actionable insights that will help improve your decision-making and lead to efficient, cost-effective management of both the IT services and resources your vendor provides.

In short, it’s time to put an end to all the uncertainties in your outsourcing contracts. Take a collaborative approach to start finding the answers you need, because I guarantee that once you do, you’ll discover that when it comes to managing IT outsourcing vendors, knowledge is power.

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Before joining Apptio as VP EMEA, Colin Rowland was senior VP of operations for both OpTier and Opware, a data centre automation software company (since acquired by HP). Prior to that, he was responsible for building Mercury Interactive's application performance management business unit in EMEA through its high growth phase. Previously, Colin held sales and management positions at Hewlett Packard, culminating in founding the software sales organization in the UK. Before moving into field operational roles he was a software engineer at British Aerospace.

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