IT outsourcing customers cling to cost-savings mindset

IT leaders continue to focus on cost containment with their IT service deals, but in today’s business environment companies will have to spend money to save money, according to KPMG’s David Brown.

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Even when buyers and providers can come to terms with a model for risk/reward or gain-sharing, it is difficult to contract and work into service levels. It is often in the contracting phase where these models unravel. Many buyers are also still concerned that they do not have adequate visibility into service provider operations and costs to fully vet the input to any models that are used to calculate gains. If customers want to move beyond purchasing commoditized services (which are unlikely to deliver huge cost savings in the future) and are looking to service providers to help them in other areas such as market expansion or product development, won't they have to embrace new outsourcing models?  

Brown: Yes, as buyers focus on the benefits derived from outsourcing above and beyond cost savings, different pricing models, such as outcome based pricing or subscription pricing, must become more prevalent. 

It is important to distinguish between new or different pricing models for these newer service delivery goals and applying these models to traditional efforts focused on cost savings. The pricing model employed needs to fit the goal of the effort. Supporting market expansion could carry a fixed cost based on infrastructure investments, and also that variable cost of meeting certain goals relative to time to get operations up and running, the portfolio of services made available, and meeting required deadlines.  It could also carry a market cost element based on the provider “selling” service capabilities once infrastructure is deployed, similar to a cloud pricing model. 

Supporting M&A, however, could require much different pricing tied to incentive(s) to achieve a set of goals in a specific time frame. Another M&A scenario could see a buyer seek the ability to easily and quickly ramp up or ramp down services to support the acquisition or divestiture of assets and thus have a higher demand for flexible pricing models. But with both of these examples, the provider is also at risk given many new market penetration and M&A efforts do not meet stated goals largely because the goals were unrealistic or the client could not execute as required. And what do you tell IT outsourcing buyers about moving beyond a cost cutting mindset?  

Brown: Determine where IT can bring the most value to current business strategic initiatives and, from that, determine what it takes to do so. Develop valid and defensible business cases for any investments, initiatives, and efforts that are not just promising cost savings. Develop realistic, multi-year ROIs for any investments that create a loss early on. Ensure the CIO is loosely aligned with business leadership and has the true credibility needed to ensure IT is viewed as a strategic asset and not just a cost center. Our recent CIO survey showed a lot of misalignment between CIOs and line of business and corporate executives in terms of priorities and top investment areas—this is a recipe for recurring problems. And what advice do you offer outsourcing customers who are interested in adopting new outsourcing approaches?

Brown: Don’t over-engineer any pricing model.  Be realistic and start small. Ensure there is adequate visibility into all cost and pricing elements so as to be able to accurately perform required calculations. Take a truly collaborative approach with service provider(s) in developing models; remember you get what you pay for, and the providers need to make a profit. Monitor closely, adjust as needed, and quickly identify root cause of any problems, errors, or inaccuracies.

Copyright © 2016 IDG Communications, Inc.

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