Outsourcing 2.0: Workable Business Models for IT Chargeback

SOA is being used to transform the client's IT environment to a suite of managed services, then billing the environment back to the client in a managed pay-per-use model.

By Mark Denne
Mon, June 02, 2008

CIO — High performance businesses have begun to use new models for funding IT within an enterprise. Instead of the traditional cost center model, advancements in service-oriented architecture (SOA) and service-oriented infrastructures (SOI) enable IT organizations to move to an environment in which IT is consumed and paid for on a metered basis. This "pay-per-drink" model has three advantages: It elevates the status of the IT organization from a cost center to a value center, it helps redefine the IT organization as a service provider, and it provides the commercial framework in which to run IT as a "business within a business." It also raises the stature of the CIO within the organization.

IT chargeback represents a significant change in the culture of an enterprise. Unsurprisingly, it takes a while for the new model to be understood and embraced. It needs to be thoroughly road-tested first. For this reason, many high- performance IT organizations are choosing to introduce chargeback internally, between the application layer and the infrastructure layer (the systems, network and storage that support the applications). This allows the model to be tested and proven, before IT "raises the bar" and exposes it to the lines of business. (Also read Chargeback Demonstrates IT Value In the Enterprise.)

The introduction of chargeback for infrastructure usage has a very interesting side effect. If an organization unitizes the cost of its key infrastructure components such as compute time, storage capacity and network data transfers, using comparable metrics, the opportunity exists to meaningfully market test those costs against third parties. To the IT organization it provides a powerful tool to measure its own cost-effectiveness.

On the flip side, to infrastructure outsourcing (IO) providers, it represents an opportunity to demonstrate value by comparing their price per unit with the potential client's internal cost per unit.

However, for infrastructure outsourcing companies with a technology consulting arm, the opportunities afforded by the new model are even greater. Instead of a traditional "your mess for less" play, high-performance infrastructure outsourcers can engage in "transformational outsourcing." In this new model the client's existing environment is first transformed to a standard model amenable to unitized pricing, and then billed back to the client using pay-per-use pricing. The costs of the transformation are offset by the subsequent pay-per-use fees.

Why Do We Need a New Model?

Conventional infrastructure outsourcing is about transferring IT systems management headcount, depreciation and facilities costs from the client to the outsourcer in exchange for periodic fees. For the better part of 25 years it's been viewed as a means of saving money, acquiring expertise in new technologies, and accelerating product development lifecycles. In many respects, conventional IO has been successful. Forrester Research reports that 38 percent of conventional outsourcing arrangements are considered a success by customers and Dunn and Bradstreet reports that 50 percent of conventional outsourcing arrangements are still active after five years.

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