It’s always a good idea to benchmark your outsourcer’s prices periodically against the market. But what if you find that your IT service provider’s rates are too low?

It could happen. And it’s not usually a good thing. While every benchmarker, client and outsourcer has an opinion about acceptable variances in IT service rates, outsourcing prices that come in at more than 20 percent below the market rate are red flags.

Prices that are too low can lead outsourcing vendors to issue more change orders for work they claim is beyond the scope of the original contract. Bargain basement prices can also push vendors to replace skilled staff with lower-cost personnel and innovate less. And they can lead to poor service that may not be covered by the client’s service level agreements (SLAs.)

“Many service level agreements are written to provide the customer with relatively little protection; the targets are easy for the vendor to meet, while the actual service fails to adequately address the business needs,” says Bob Mathers, principal consultant with Compass Management Consulting in Toronto. “If the vendor is making a fair margin, client and vendor can work together to close this gap. If the vendor is bleeding, they are more apt to stick to the letter of the contract and provide nothing more, leaving internal IT groups to pick up the slack.”

Services Likely Priced Too Low

Under-pricing can show up in almost any area of service–except storage, where costs fall so fast it’s hard for outsourcing contracts to keep up. Areas of service that tend to experience flat or marginal price declines over time, such as service desk or desktop support, often end up priced too low down the line.

“Also, if the client environment changes over the life of the contract in a way that makes it more expensive to support–decentralization or greater complexity–and prices have not increased to reflect these changes, that may result in contract prices that are below market,” adds Mathers.

There can be valid reasons for cut-rate pricing, but that’s less likely in today’s mature outsourcing market. “If a vendor organization can leverage particular capabilities to lower their costs, they have a competitive advantage that may allow them to lower their pricing while maintaining margins,” says Mathers. “That said, there are few levers left for vendors to pull. If a benchmark shows pricing to be below market, and the benchmark properly accounted for all material drivers of price in the services, it is safe for the client to conclude that the vendor most likely has lower-than-market margins.”

Bargain basement rates often are a result of errors on the part of the provider. Outsourcing prices are complex to set–even for the pros. “I once saw a mainframe deal where the applications were priced at 30 percent of market. I don’t even think the vendor ever figured that out,” says Adam Strichman, an independent outsourcing consultant in Mechanicsville, Va. “Application hours are a complicated calculation even for the best pricers and benchmarkers. Often, the accountants measuring the deal screw up the pricing.”
Outsourcing customers may never notice that their prices are too low, either, particularly if their demand for IT services and, thus, their overall costs, are rising steadily.
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“[Underpriced IT services] can hide quietly for years with no problems,” says Strichman. “However, when they grow, it brings problems front and center, as the vendor tries to make it up elsewhere, which causes friction.”

Address Price and Service with Your Vendor

Most clients that discover that an outsourcer is actually charging too little want to keep quiet, says Strichman, “but in many cases, it just makes matters worse.”

No one wants to see their IT outsourcing prices go up, but smart customers opt for openness. “The first step is to acknowledge that this is a situation that needs be addressed,” says Mathers.

Customer and provider should meet to discuss how to lower support costs (greater standardization, offshoring, more integrated processes) or expand the scope of services to allow the vendor to increase revenue and lower client costs. If there is no way for the vendor to make a reasonable profit on certain services, says Mathers, it may be time to shop for a new provider or bring them in-house.

In some cases, client and vendor will agree to rework prices “to better align not only with the vendor’s costs, but with the way that the business consumes IT services,” Mathers says. “This gives the business the levers it needs to affect its IT charges through better demand management, and ensures that the vendor’s support costs are aligned with its revenues.”

Source:http://www.networkworld.com/news/2010/030910-are-your-outsourcers-prices-too.html?page=2

Companies could use IT outsourcing services to make their contact centre operations more efficient, according to a new study.

The Contact Centre Business Transformation report by Datamonitor claimed that firms can work with an outsourcer to align their contact centre more closely with the customer relationship management aims.

According to the research, companies can benefit from reduced spending on infrastructure and human capital, as the outsourcer provides these, while the quality of service delivered to customers can be improved and corporate risk eliminated.

Peter Ryan, lead analyst for call centres and business process outsourcing at Datamonitor, commented: “In light of escalating costs and service demands we are seeing a focus on new and innovative contact centre operating models.”

Jeff Smith, chairman and chief executive of Teleperformance UK, which commissioned the research, also said firms who used outsourced contact centres can maintain communications with their customers while working within a reduced budget.

Earlier this year, Tink Taylor, managing director of online marketing agency dotMailer, predicted that email advertising will be used more across social networking platforms over the next year.

Source:http://www.ihotdesk.com/article/19658844/Outsourced-contact-centres-save-money,-says-report

Capgemini has flagged its intention to offer customers a path toward consuming IT as a service, dipping its toes in the water in a deal with HarbourMSP and HP that offers an application testing environment as a service.

The service builds on a long-standing relationship between systems integrator Capgemini and hosting provider HarbourMSP for the provision of managed IT services.

Under the deal, Capgemini customers can gain access to a test and dev environment running the Nu Solutions testing software (acquired by Capgemini in September 2009) running on HP hardware, hosted on HarbourMSP racks and delivered over the network.

Deepak Nangia, Capgemini Australia’s managing director of new business told iTnews that the service would be applicable to “those customers that don’t have capital for the boxes” required for test and dev.

Nangia said that due to the immaturity of the cloud market, the service is only offered to Capgemini customers “on a case by case basis”.

Capgemini Australia is also reselling an online procurement engine called IBX, hosted out of Sweden, which Capgemini (global) acquired in February.

Beyond these two initial services, Capgemini has established a new business unit called “Infostructure Transformation Services” which charges consulting fees for providing advice to those customers migrating services to the cloud.

Capgemini’s heritage in Australia is in consulting – upon acquiring the Australian operations of Ernst and Young, consulting made up some 60 percent of the company’s operations.

Today, consulting makes up around 25 percent of its business, as the company has scaled up its technology implementation and outsourcing services.

The company’s outsourcing division runs a business process outsourcing centre out of Adelaide plus application development and maintenance out of India and China; while its technology division runs implementation services around ERP suites from the likes of Oracle and Sun.

“All customers tell us is that they want to convert their CapEx to OpEx, but they don’t know how to get there,” Nangia told iTnews.

These consulting services will “work out a transformation roadmap to move some applications and services to the cloud,” he said. The consultants will help customers identify “which are the cloud-friendly services” versus those that “are likely to get a backlash from the business.”

Source:http://www.itnews.com.au/News/169195,capgemini-offers-test-and-dev-as-a-service.aspx

I have learnt the hard way that trying to outsource on the basis of “manage my mess for less” is a sure fire way of crashing and burning at worst and being more expensive at best. Anything that is crucial to your firm’s success, you do not outsource. In other words, only outsource which is a commodity and it is easy to switch suppliers such as perhaps storage management, electricity supplies, sewage, catering, cleaning, etc.

Lo and Behold, here’s a paper which provides some more data to back up the idea that outsourcing actually pushes up your costs. The data used is crucial and I quote
0% of the sample companies partake of outsourcing some or all of their IT activities. The authors find that while on a project level, they might see a reduction in the IT costs and spend, on an aggregate firm level, the IT spend actually goes up. Note that they do control for scope and volume changes by looking at the sales growth. Within two years of outsourcing, the IT cost level of firms who have outsourced is correspondingly higher than firms which have not outsourced. While the authors suggest that this is because of capabilities are enhanced, I have my doubts. One cannot improve IT capabilities in 2 years, it is simply not possible to evolve the business and IT side so quickly that a statistically significant improvement in productivity and quality can be observed. It is, in my opinion, clearly aimed at the fact that the business case is frankly wrongly specified and outsourcing doesnt really help as far as cost control is concerned.

Business cases are rarely expressed in terms of ratio’s, in other words, you will very rarely find that the managers concerned or the IT outsourcing firm are quoting you IT costs as a ratio to say the sales revenue or operating costs or profits of the firm. This is why I am very nervous whenever I hear that outsourcing is happening which is going to drive down costs.

There is a good argument to outsource to improve efficiencies, drive a centre of excellence, to improve productivity, but for cost purposes, the figures do not bear out the benefits.

Source:http://desicritics.org/2010/03/06/174055.php