Consider the Source

Cloud Pricing Still Foggy

By Scott Feuless, Principal Consultant, Compass Management

One of the key benefits cloud computing promises to deliver is that of flexible, usage-based pricing for IT resources: use more, pay more; use less, pay less.  This model gives businesses transparency into actual consumption and eliminates – at least in theory – the problem of managing insufficient or idle capacity.  The result is optimized efficiency and a more agile enterprise.

The problem is, cloud pricing models aren’t yet capable of measuring IT usage in a way that’s granular enough to bill for it.  Consider, for example, CPU minutes, a basic pricing unit for cloud services.  Unless they’re running a mainframe, most internal and external IT groups today don’t have the monitoring tools to measure and log CPU minutes.  Moreover, a CPU minute on one machine can represent more or less processing than a CPU minute on another machine, so normalization is a challenge as well.

One potential solution is to charge for access time to a server “instance,” regardless of how many CPU minutes are required or used.  While this model provides some of the benefits of increased transparency and improved demand management, it still isn’t really a usage-based model, because an “instance” can be defined in the agreement to mean 750 hours of server time, and that turns out to be a full month.  The “size” of the instance is just linked to a specific hardware configuration, so although you seem to be paying for hours, you’re really buying access to a specific server configuration for a month, which isn’t all that different from what we had before.

Another issue is marketing hype.  Since there are no real rules about how some of the terminology is used, one cloud vendor may use the same words to describe interesting new ways to deliver services that another uses to simply slap a cloud label on a traditional delivery mechanism. 

Insight into the details of pricing and service agreements is essential, as is an apples-to-apples comparison of cloud options.  CIOs need to understand the true costs that will be associated with different pricing models, the different situations in which one or another scheme is more appropriate, and how their choices will support or undermine their overall IT and business strategy.

Ultimately, if you don’t account for the full range of business and technical requirements posed by the enterprise, the cost of a cloud solution risks becoming “in addition to” rather than “instead of.”

For another perspective on cloud pricing, read this recent CST blog entry by Stanton Jones, CIO of TPI.

Make the End of Your Current Contract the Beginning of a Better One

By Roger Sparks, Partner & Managing Director, TPI EMEA;
and Bob Mathers, Principal Consultant, Compass

Editors note: On Jan. 4, the parent company of TPI, Information Services Group Inc., acquired Compass, the premier independent global provider of business and information technology benchmarking, performance improvement, data and analytics services. This TPI Top 5 was co-authored by one of our new Compass colleagues. 

The end of an outsourcing contract term is considered an ideal time to drive improvements in rates and services. But many clients go into a renegotiation under-prepared and overly confident, believing they have more leverage than they actually do. The result is a missed opportunity to address problems and strengthen the relationship.

Here are the TPI Top Five keys to optimizing your end-of-contract review:

1.  Baseline existing operations. Conduct a quantifiable, fact-based analysis of the existing environment. Include all IT services – outsourced as well as internally delivered. Understand existing costs, prices, and service levels in the context of market standards. Identify where costs are competitive and where gaps exist, and use this knowledge to inform decisions on how services might be expanded, consolidated, repatriated, or re-sourced to multiple service providers. If prices are competitive, shift the focus to governance issues, facilitating innovation, or improving process efficiency.

2.  Be specific. Following the baseline, define your objectives and expectations for improvement. While kicking out the incumbent may be too expensive and risky and is often a last resort, identifying one service tower to rebid or repatriate could be feasible. Don’t be vague and expect the service provider to be “creative,” but don’t dictate how the service provider delivers. Rather, outline a framework within which the provider team can work. 

3.  Get boardroom support. You need the backing and support of senior management to be successful. This won’t happen on its own. Show that the sourcing strategy addresses constantly evolving business requirements and is delivering on strategic requirements. Define the potential risks and benefits of various operational scenarios, and outline options that best align with business needs.

4.  Walk the talk. Evaluate sourcing alternatives in the context of business strategy, and be willing to pursue those alternatives if necessary to support that strategy. Don’t go to RFP simply to drive down service provider prices. When evaluating the value propositions of prospective vendors, ensure a level playing field. This enables a more effective review and demonstrates your commitment to change, motivating the incumbent to improve the status quo.

5.  Look inward. Don’t put the onus of improvement solely on the service provider. Assess your internal operations and processes to identify how you can help leverage efficiencies and economies of scale.  Are custom requirements necessary across different business units? Do you really need 20 flavors? You will likely discover that vanilla will suffice in most cases. This helps enable the “commoditization” of standardized services, which, combined with appropriately tensioned pricing mechanisms, can drive significantly lower unit costs and more effective demand management.

To negotiate your most advantageous contract you have to come into the process knowing where you stand and where you ultimately need to go. The experts at TPI and Compass can help you meet your outsourcing objectives through industry experience, our extensive contract databases, and specialized knowledge of your industry and the associated service provider landscape.

Contact Roger Sparks, TPI, or Bob Mathers, Compass, for more information.

Sourcing Market Falls Short of 2009 Activity, Grows From Previous Quarter - TPI Index

by John Keppel, Partner and President-Information Services & Chief Marketing Officer, TPI

Today’s TPI Index, which examines fourth quarter and full year sourcing market performance, indicates that market activity did not meet the level of 2009 despite growth in the fourth quarter. Total contract value (TCV) for the market was about $22 billion, down 30 percent compared to 2009.

The Index also found clients steadily shifted toward smaller contract awards and multisourcing over the last decade – increasing from 30 to 53 percent during that period. We believe this took place as they grew disillusioned with the effectiveness of traditional single-source arrangements and realized that they could customize their sourcing solutions to leverage the skills of the best in each market.

While ITO continued to drive overall market activity, its TCV of $19 billion was down 19 percent year-over-year. Application Development & Management (ADM) contracts with Infrastructure included nearly doubled in value. Financial Services returned to its pre-recession TCV of $25 billion, with Banking, the largest subsector, turning in its best performance ever.

Restructuring activity – defined as contracts that were renewed, renegotiated or restructured –accounted for one-third of the overall market in 2010, while new-scope contracts declined 25 percent for the year.

We will share specific insights on market activity in Europe, the Middle East and Africa (EMEA) with the release of the 4Q10 EMEA TPI Index on January 24^th. The full TPI Index presentation can be found below.

4th Quarter 2010 TPI Index Presentation

View more presentations from TPI.

Outsourcing Buyers Continue Choosing to Restructure Contracts – TPI Index

By: John Keppel, Partner & Managing Director, TPI Research, Analytics and Intelligence

The new TPI Index, released this morning, show that contract restructurings have continued into the third quarter as the overall market gradually improves. Total contract value (TCV) for the market was about $14 billion, down more than 20 percent from both the previous quarter and the same period last year. Restructuring activity, which include renegotiations, renewals and extensions of outsourcing contracts, represented 48 percent of the global market for the quarter and have been a key factor influencing results across the industry year to date. This interest in restructuring can be attributed to three factors:

1. Longer term contracts from the early 2000s and newer, short term contracts are coming up for renewal simultaneously
2. Economic conditions have caused many companies to be tentative about entering into new outsourcing agreements
3. Restructuring offers quicker returns and lower risk, which has been increasingly attractive to buyers

IT outsourcing and business process outsourcing also saw contract awards decline. However restructuring contract awards have indicated a maturing of the BPO segment and have increased the value of contracts with both Application Development & Management (ADM) and Infrastructure in scope. Regionally and across industry sectors, the market activity told a similar story. Despite the sluggish economy, we anticipate a significant improvement in the fourth quarter performance.

We will share specific insights on market activity in Europe, the Middle East and Africa (EMEA) with the release of the 3Q10 EMEA TPI Index on October 26^th. The full TPI Index presentation can be found below.

3rd Quarter 2010 TPI Index

View more presentations from TPI.

Technorati Tags: TPI Index,outsourcing contracts,restructuring,IT outsourcing,business process outsourcing

Keeping Your Healthcare Sourcing Strategy Moving Forward (with Confidence!) During Turbulent Times

By: David J. McCament, Director, Healthcare Payer / Provider, TPI

Today’s global economic conditions are unprecedented for decision makers in healthcare. For example, every part of the United States healthcare business model is undergoing significant and unpredictable change; and we’re not even close to the finished model. 

Despite these turbulent times, healthcare payers and providers who are embarking on or are in the middle of major strategic business projects are wondering how to align their sourcing strategies amid this constant, multidirectional change. 

There is no time like the present for healthcare payers and providers to capitalize on chaos to improve operations and prepare for the new healthcare environment. Here are the TPI Top 5 actions you can take in the near term to drive contractual flexibility, increase speed of value realization and maximize the value derived from your sourcing relationships.

1. Reduce the number of key service providers and then increase leverage with those that survive your vetting process.

2. Renegotiate current contracts to reflect the changing environment. Consider the future benefit streams of your contracts and “pull them forward” contractually to realize their value sooner. Seek to consolidate multiple contracts with the same service provider to improve leverage across business units.

3. Now is the time to establish (or fine tune) rigorous Service Management & Governance oversight processes to ensure maximum value realization from your current contracts.

4. Look outside the traditional healthcare market for sourcing ideas and executable models. Examples of other industries that have proven track records in sourcing include banking and financial services, manufacturing and telecommunications, all of which have been successfully sourcing non-core functions for decades.

5. Establish an enterprise-wide sourcing advisory council to document and propagate your organization’s sourcing philosophy. For example, consider the bigger picture of sourcing as not just “outsourcing,” but as the application of resources form every potential source to solve your business challenges.

Now is the time to re-assess your sourcing strategy and re-evaluate your current sourcing relationships. Reset the performance bar, define/refine what innovation means to your firm and make sure to measure service providers’ execution of their contractual obligations.

TPI’s experts can help healthcare organizations produce an objective assessment of your current sourcing strategy and develop a roadmap for your future strategy with objective, risk-balanced, and forward-oriented solutions for maximizing value during these turbulent times.  

Take charge; set direction. Contact David K. McCament, Director, Healthcare Payer / Provider, TPI, to learn more.

Effective Negotiations for Software Licensing Agreements

By: Hack Heyward, Director, TPI, Inc.

 

 

 

When a buyer is in a position to apply some leverage in negotiations with software vendors, there are three critical provisions that can be used, but may require a significant push:

 

1. Maintenance fees as a percentage of the discounted license fee, not the list license fee.
2. Language that locks the software vendor into providing a defined set of services throughout the term.  Many software vendors offer several types of support, but will redefine the terms over time requiring buyers to purchase a more expensive level of support.
3. A fixed percentage of the license fees over a period - usually no more than five years.

On the other hand, here are two provisions, related to your software license, that would be great to have, but are very difficult to obtain because vendors don’t have much flexibility:

1. Paying for and receiving maintenance only when it is most convenient.  Ideally one would like to begin paying maintenance only when licenses go into production and value has been gained, instead of immediately upon licensing.
2. Negotiating the price of maintenance down between 17% and 20%.  Wall Street has adopted this percentage as a predictor of gross margins.  Even though the ongoing maintenance revenue coming into a public company like Oracle depends greatly on other factors like the original discount and whether licensees simply drop maintenance, Wall Street can calculate this percentage and ask about it.  If a public software company began allowing this percentage to erode, Wall Street would hammer it. 

In summary, I suggest that buyers negotiate where the vendor has the ability to be flexible.  Remembering these two steps will save companies a lot more money:

1. Get the greatest possible discount at the beginning and make sure that the annual maintenance percentage is tied to it.  Find out what discount the government and similar sized companies receive.
2. Don’t overbuy. Purchase fewer licenses than project people may need. This won’t be easy because technical people naturally want to have enough licenses and budget managers don’t want to ask for more funds.  Push back, because the penalty for not buying enough licenses is  buying more, while the penalty for buying too many is annual maintenance on extra “shelfware”. Most software vendors won’t sell maintenance on just 75 if 100 are licensed. 
     

Pulling the Renegotiation Levers

Dale Hearn of TPI’s Financial Analysis Services Group will be "blogging about the bottom line" this week.

Of the many factors that come into play during sourcing decision-making, financial drivers within the existing contract are critical.

Companies must decide whether to renegotiate their contract with their current provider (re-source), choose a new service provider, or bring the services back in house (in-source). Several clients that I worked with over the past couple of years made a conscience decision to renegotiate with their current service provider based solely on the overall financial implications of the deal.  For more information, check out my colleague's whitepaper.

Service levels, client satisfaction surveys, balance of trade issues, and executive relationships all had an impact in renegotiations, but the most important factors for these clients were based on the NPV (net present value) and profit margins over the term of the deal.

How To Succeed In Sourcing By Really Trying

I’m sure many of you have seen the recent posting on CIOInsight.com, IT Outsourcing: Expect the Unexpected, about whether cost savings really materialize through outsourcing.

Both the CIOInsight.com survey and recent TPI research support the same theory: Nothing of value comes without effort.  Results, notably cost savings, come from diligent management.  (To read our study, see: Restructuring Outsourcing Agreements: An Indication of Failure, or a Tool to Increase Value?.)

However, one of the unspoken realities in the CIOInsight.com report is the urgency to avoid entering an outsourcing relationship that is doomed from the outset.  Our experience reveals that about 35% of aspiring outsourcing clients are guided to take another path – shared services, internal transformation or captive offshoring.

The principle reasons for avoiding an outsourcing agreement?  1) lack of readiness to change the management models employed across the enterprise; and 2) lack of resources to effectively manage outsourcing relationships.

The CIOInsight.com report focused on whether money is saved.  That’s certainly one perspective, albeit arriving at an answer requires a complex computation for most firms.  A true analysis means asking, “What  would I have spent had I not outsourced?” compared with a view of “What have I actually spent for the same quality and volume of services?”   Again, those are difficult computations.

Informed research on the topic reveals that outsourcing, if done right, is always a money saver. The key is to know when to do it, how to do it right, and the best way to manage results.