The Price of IT Outsourcing

Crafting the best outsourcing deal for your organization – one that delivers the needed services at the (guaranteed, of course) levels – is a complex business. Throw in the pricing aspect, and things get even more complex.

With that in mind, it pays to talk with the experts. And that’s what I did. Late last week I spoke with Anirban Dutta, a director at Computer Sciences Corp. (CSC) and co-author of a new book, “Winning Strategies – Secrets to Clinching Multimillion-Dollar Deals.” Dutta wrote the book, which looks closely at the winning strategies of those who’ve crafted and won high-value outsourcing deals, with Hetzel W. Folden, a VP at CSC.

The book is targeted at service providers, but there’s plenty of good information in it for CIO- and IT-types who want to better understand the machinations of outsourcing contract deal-making, and the mindset of the service providers making those deals..

Anyhow, Dutta and I talked about some of the challenges, opportunities and trends in pricing of outsourcing deals, and I’d like to share with you some of Dutta’s thoughts.

1) Don’t fall prey to procurement-only pricing models.

While an organization’s procurement group is going to evaluate and hold sway over the outsourcing deal, it’s important to lobby for a holistic view of the contract. The procurement group is most comfortable with line-by-line, itemized pricing but that may not be the best pricing model for your outsourcing deal. It may work if the scope of the deal is well understood, the terms are short and well-defined, but it does not allow for flexibility. There are more advanced pricing models that may work, including what Dutta refers to in the book as total cost of ownership (TCO) reduction. Here, the scope still needs to be well understood, but service providers will analyze what the client spends and offers up a percentage saving on that spend.

2) Cutting, cutting costs can lead to cutting, cutting service.

Thanks to the current economy, costs are what many companies focus on when they sit down at the negotiating table with a prospective service provider. Clearly, companies want the best price. But Dutta challenges service providers to be candid with potential clients. He suggests both parties discuss in detail, and thoroughly understand, how lower prices may affect service. “Service providers are going in with lower price points,” Dutta says. “But they have an ethical obligation to be have candid conversations. They need to tell clients that they can do a deal at a lower price point, but they also need to outline the risk exposure that could come with that price point.”

3) Take note of some of the innovative pricing strategies, and see if they might work for you.

Dutta says a few service providers, particularly Indian companies, are starting to put in a discount up front that equals what the provider promises to save the client over the life of a contract (savings garnered from efficiencies, etc.). Instead of outlining a deal that “shows” what a company will save in the next five years, these providers are giving that amount up front.

4) Cloud computing will be a game changer for pricing.

Dutta warns that cloud computing is still a fairly new concept, but it is definitely one worth watching. “What cloud computing is going to do, and what it does now, is move infrastructure to a layer of abstraction and your capital expense is going to be removed,” he says. It also introduces new players, “because even Amazon is offering cloud services,” and that will impact competitive play between traditional IT service providers and this new generation of cloud computing providers, Dutta says.