Posts Tagged ‘IT costs’

I’ve spent many years as a consultant helping companies analyze their business to improve performance and reduce costs, Clients large and small often ask questions regarding outsourcing/managed-sourcing. They’ve often read case study after case study showing how companies of their size/in their industry have shown real cost savings from their IT outsourcing programs, but their own initiative seems to be lacking in some fashion, often experiencing cost overruns and sub-par service levels.

I always come back with the same answer – A question:  Did you have the right information to make this business changing decision, and did you enter into your agreement from a position of strength?  The prospective client’s answer is usually slightly defensive, wondering why I’m questioning that company’s decision-making ability.  Which essentially I am – clearly something is amiss. At this point, the wheels are in motion and a serious conversation about how the agreement was entered into can take place.  This conversation is meant to figure out what has gone wrong and how it can be fixed.

Here are the main points where an outsourcing agreement can go wrong:

  1. Is the true cost of IT known and understood?
  2. Was proper due diligence performed and a business case developed?
  3. Did you open negotiations to multiple companies so as to get the best deal for your enterprise?
  4. Are you enforcing the contract?
  5. Has your company had any changes that would affect your agreement.

If these five questions can be answered, your company will be well ahead of the game and can facilitate changes that will help resolve the issues you may be experiencing. Lets look at these a bit more:

Understanding the true cost of IT

Many companies think they understand the true cost of IT, but most don’t.  It’s not just what is in the budget, it’s what isn’t as well.  Since every employee is part of the larger family, things are often done in a way that wouldn’t necessarily be the case with an outsource company.  For example, IT support staff would likely service a broken computer while they happen to be in that particular location to fix something else; an outsource company won’t (and unless on-site, can’t) do that.  There are hundreds of other “off book” examples (an ad-hoc server repair in the datacenter without a ticket being called into the help desk, perhaps) that, once outsourced, will no longer occur.  These are true costs of doing business that are challenging to foresee and don’t always get accounted for internally, however with an outsourced vendor these types of activities become chargeable events. In a large organization, this can lead to millions of dollars in additional outsourcing costs.

Performing Due Diligence to get the best deal possible

Knowing the true cost is the first step in the due diligence process.  Other things need to occur, including:

  • Prioritizing which functions should be run internally and which should be run by experts that can drive costs out of the equation
  • An understanding of which parts of the labor force will be affected either by being re-tasked to the outsourced vendor running the operations or being relieved of their positions entirely
  • Service levels need to be agreed to internally; and
  • Building a business case that supports the initiative, this includes noting all assumptions so as to be able to go back and audit.  By doing this, the company knows what is expected and then study the agreement forensically to uncover why the initiative is not proceeding as planned.

Handling Negotiations to Secure the “best” deal possible

Each company has their own process by which they procure goods and services.  The key questions to ask here are:

  • Were your company’s policies and procedures followed?
  • Were RFI’s and RFP’s constructed properly and submitted to all viable vendors?
  • Did your company negotiate purely on price, and were factors such as the Service Levels (mentioned above) taken into consideration?
  • Did you do research on the providers, talk to their current clients, etc to make sure they were the right fit for your needs?

All of these questions need to be given consideration up front, or you’ll risk the likelihood of compromised service down the road.

Enforcing the agreement with the selected vendor

This is key. Your company, when entering an outsource agreement, must establish a structure to allow for monitoring of the agreement and related SLAs. Is the vendor living up to their end of the agreement? If no, are steps being taken to alleviate the issues?  If you are not monitoring your agreement, you are as much at fault as the vendor for any perceived failures.  The agreement and the activity associated with it need to be continually monitored, and analyzed.

Knowing the changes in business conditions that might affect your outsourcing agreement

These business conditions can take many forms, and some affect all business – the current downturn in the economy, for example.  Perhaps your company may not have grown at the rate assumed in your business case and therefore in your negotiations with your chosen outsource vendor.  Other condition changes to consider include mergers and acquisitions, perhaps you are using more computing power then you estimated and did not take into consideration when purchasing another company.  Have you come out with an incredible new product that has driven growth within your organization? This is a good affect, but one that may not have been included in the portion of the new products business case that deals with internal costs such as IT, manufacturing and supply chain management.  All of these reasons and many others can affect the actual agreement, therefore it’s a must that your agreement be continually monitored as I noted earlier.

Conclusion

Several reasons can result in your company essentially leaving dollars and services on the table with respect to outsourcing.  There’s no such thing as too much thought when evaluating an outsourcing initiative.  If you need help, there are many experts available to you who can provide guidance and help develop a sound strategy tailored to your organization. Whatever your size or complexity of project, we’re here to help.

4 tips for selecting the right consultant

by Brian Beedle on August 16, 2010

The vendor selection process can be an arduous, time consuming, and stressful task.  Receiving quotes that run the gambit of the budgetary spectrum, deciding which product will give your company the biggest bang for the buck and wondering if saving a dollar or two is really worth the frustration of finding the “right partner”.  Every Project Manager has dealt with these issues, but keeping in mind the following points may provide some clarity and assist with narrowing the decision-making process when seeking a value-added business partner.

  1. Prepare a well defined project scope
    • Create a list of requirements. Ensure all aspects of the project are being captured.  Alignment and agreement within the organization must occur first and foremost.
    • Project Scope must outline all roles and responsibilities.
    • Establish all high level deliverable dates and the associated milestones for the project.
    • Sign-off from the Executive sponsor of the project must occur at this stage.
  2. Gather a list of recommended vendors and interview each. It is critical that the following points are addressed during the interview process to ensure that the vendor(s) have the resources available and the knowledge to deliver a final product that aligns with the project scope.
    • It is important to determine the level of experience that the consulting team exhibits.
    • Request resumes for the consultants on staff.
    • Inquire as to the specific projects these consultants have worked to qualify the expertise that exists.
      • Do they have relevant industry experience?
      • Speak to them about a “proven approach” to a similar project and how they were successful in delivering in a timely manner.
      • How many dedicated and part-time resources are available?
    • What involvement (if any) is the customer expected to contribute?
      • This is key in determining not only the resources that your organization will need to dedicate, but will also have an impact on the billable hours being allocated for the project.
      • Keep in mind, having an internal resource dedicated to the project is a great way to leverage the “hands-on” experience as a training mechanism.  In addition, these employee costs can be capitalized, reducing the expense budget.
    • Does the vendor’s Project Lead have a Business or Finance understanding or does this person strictly possess a technical background? Depending on the direct involvement of the business users, this is an important issue that needs to be considered.
    • Have a thorough understanding of how your organization is going to be billed.
      • Understand how your organization is going to be billed and at what milestones.
      • What is considered as reimbursable expenses at what percentage is this “capped”?
    • Request three business references in which the vendor has successfully implemented a similar product.  It is acceptable to ask for examples, or a letter of recommendation from former or current clients.
  3. Depending on the result of the interview stage, make a request of the vendor to develop a proof of concept. Compare this document to the original project scope
    • Does the Proof of Concept support the Project Scope and required end result defined by your organization?  Ensure that all key deliverables are being met.
    • Ensure that the timelines seem reasonable. Do they align with the deliverable dates of your organization?
    • Don’t hesitate to challenge the methodology or the approach being used by the prospective vendor.
    • Compare the approaches of the different vendors – It is important to keep in mind that you are the subject matter expert, push back on what does not seem reasonable.
  4. Negotiation
    • The lowest price does not always constitute the best solution. However, staying within an allocated budget is important. Do what is fiscally responsible for your organization; do not sacrifice quality or functionality just because a vendor comes in with a significantly lower price.  It is important to deliver a product that is going to meet the expectation of the sponsors.
    • It is important to understand what level of post-implementation support, training, and maintenance is included. This can be used as a key negotiation point.

These high-level items touch on a number of areas that should be considered during the vendor selection process.  Of course, there are a lot of other aspects that may need to be considered for your organization which go beyond the areas addressed here. Be resourceful. Don’t hurry off to start a project without doing your due diligence by investigating and selecting a firm that fits your needs. The results of a good implementation can change the way a business functions, the remnants of an implementation that is not successful can have even longer effects

One of the best ways to keep Information Technology (IT) costs to a minimum is through a systematic  undertaking known as Lifecycle Management.  A successful implementation will make it easy for IT, finance and the user community to know many vital pieces of information and be able to act upon them.  The knowledge that becomes known is:

  1. What the company owns or leases (hardware, software and services)
  2. What the company uses and where it is, and
  3. Is the company getting what the vendor has promised (bang for the buck).

The main key to success is sound process.  This cannot be stressed enough, hard work in the planning and implementation stages will reap huge benefits once your lifecycle program goes into production.   The more operational groups within the company that you can include in your planning stage, without giving them say over the ultimate solution, the more useful your lifecycle program will be.  An example of this is including the finance group in the planning process.  With the participation of the finance group, the lifecycle management system can ultimately feed the company budgeting system, making the budget process more efficient.

Stage 1:  Contract Management; What does the company own and lease?

It may surprise you that many companies cannot answer the simple question: What IT assets (hardware, software and services) do you own and lease?  By being able to answer this question, costs (potentially millions of dollars depending on the size of your organization) can be saved and reallocated to other corporate initiatives.  This is achievable through weeding out expired leases, eliminating hardware maintenance that is no longer applicable and the write-off of corporate software and hardware assets that are no longer in use.

The easiest way to start getting this information is to look at the previous year’s payments – accounts payable.  This will let the person or group managing this process to see what vendors the company is doing business with.  This action should be followed up by an inventory of that file cabinet full of contacts that no one ever opens.  Once inventoried, each vendor should be contacted to make sure all agreements in place are known and copies are on file with the contract management project.  This allows the second phase of contact management to happen, building a usable database.

Ideally, the database being built will eventually be used to inform IT managers that the equipment they use is coming to the end of useful life whether owned or leased.  Secondly, on the software side, managers will be informed when annual maintenance is due, how many licenses are owned, and by tying the asset management system, talked about later in this article, how many licenses are being used.   By getting this information early, managers in all areas of operations can make informed decisions and have time to act upon them; ultimately saving money by lessening the frequency of late payments and owning what you are using and planning to use in the near future.

Stage 2:  Asset Management; What does the company use and where is it?

Knowing what your company uses and where it is located is as important as knowing what you own.  By knowing these facts, groups both within and outside of IT can more effectively budget, plan and allocate resources.  Examples of this include: 1) The data center facilities group can more accurately plan for power expenditures, floor space usage and eventual expansions of the data center environment, if they know what equipment is being used and where it is located;  2) The disaster recovery group can plan their activities more effectively when they know exactly what equipment is being used and what software and applications are running on it;  and lastly 3) By knowing what is running on servers and the percentage of usage, etc.  Equipment can run at a higher usage level and put the purchase or lease of new equipment further into the future.

For larger enterprises, it may be cost effective to hire a company to do a complete physical inventory of its IT assets.  The results of this physical inventory can be analyzed against the information acquired in the contract management activity and then analyzed against the company’s IT department’s system wide device finding software (i.e. Microsoft, HP Open system, and various other vendors).  The asset management team can then work to figure out the differences between the three systems, which should not be more than 15% of the total assets.

On the software side, there are many agent and agent-less products that can be put onto the company’s network to discover what is running on each piece of equipment the software can see.  With the data that is provided, analysis can take place between what is owned and what is being used.  You may find that through many projects over the years you now own, say, 15,000 licenses of a certain software, even though you only have 10,000 employees.  Action can be taken to cancel the annual maintenance on unused licenses and write-off the non-depreciated capital expenditure associated with the purchase of the software.  You may also find that you are under-licensed on certain software applications, so be prepared to have some expenditure offset the overall savings that will occur.

Stage 3:  Vendor Management; Are vendor promises being kept?

This portion of lifecycle management is the most subjective.  Measuring if a vendor is truly providing what they say they are is complicated.  Metrics and Key Performance Indicators (KPIs) need to be developed for each obligation each vendor has signed up for.

Example:  If a PC vendor makes the claim that your company will get 20% longer life from their product, as opposed to its competitor’s product, metrics and KPIs need to be developed so that the results can be reported on either monthly or quarterly.

Hopefully your analytics came to the conclusion that your vendor is living up to the agreement it signed, which is usually the case.  If the vendor is not living up to it obligations, there could be many reasons.  These reasons include:  1) scope of work was not completely known at time of signing, meaning that failure to live up to its obligations are partially the fault of the customer, and just as likely 2) the vendor made claims it could not live up to, just to get business .

There are many ways to report vendor management information.  I have found that the most effective way is a simple dashboard, a quartered one-page report that shows all pertinent financial, contractual, usage and service information.  Once approved by corporate powers, a scheduled meeting takes place and the findings are presented to the vendor.  If vendor is living up to contractual agreements, future strategy or other topics may be discussed.  If the vendor is not providing its obligations, a discussion of why will definitely occur, followed by ways in which improvement can be made.  This is not necessarily a bad conversation, new understanding of the relationship will definitely take place and the corporate relationship will become stronger though the process, as long as positive results ensue.

Conclusion:

The steps listed above need to be tied together, resulting in an interface which brings all the information to a usable form. This is crucial.  Once this happens, the magic starts: managers are able to make informed decisions, leased equipment is returned on time (instead of having its monthly payment made for years on end) and overall, IT costs are minimized.  The company only pays for what it is using and at the end of the day, controlling costs while providing needed services, is the name of the game.