Outsource evolution
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IT services providers offer new models of engagement, but do the really favour the customer
Demand for clearer value is driving diversity in IT services
There has always been a certain degree of choice available to organisations that are seeking to outsource IT.
To differentiate themselves in a crowded marketplace, suppliers have been forced to develop new payment models, new service offerings and facilities in new geographical locations. Build-operate-transfer, managed services, out-tasking – these are just a few of the well-established ways in which an organisation can involve a third party in their IT operations.
This variety of engagement models has not always translated into clear customer value, however.
A 2009 survey of the chief financial officers of businesses that outsource IT, conducted by outsourcing consultancy Cognizant, was revealing. The study found that 78% of the CFOs believed that the value for money they received from IT outsourcing was ‘unclear’, while only 38% were confident of the ability of their organisation’s CIO to communicate the benefits of their particular outsourcing engagement to the business.
This finding may say as much about internal accounting and cost-justification practices as it does about the actual value that may or may not be delivered by IT outsourcing. Either way, though, businesses need their outsourcing providers to deliver clearer value. This impetus is only likely to intensify because, as a recent study by analyst company Gartner discovered, CFOs are wielding increasing control over IT spending in the wake of the recession.
Outcome-based pricing
IT services suppliers are happy to oblige, at least on the face of it, and the downturn has accelerated the development of alternative ways of outsourcing IT. “In the past two years, we’ve been constantly looking at changing how we fundamentally engage with our clients,” BG Srinivas, head of Europe at offshore IT services giant Infosys, told Information Age recently, “and we have incubated what we call new engagement models.”
Srinivas says that the recession drove demand for IT services contracts in which charges are linked to a certain business metric, for example by charging for each transaction. “When we saw clients go through the challenges of the past two years, they found it extremely difficult to manage their costs because their business demand fell so radically; so they were under pressure to cut costs, and a significant part of their [Infosys] costs were fixed costs,” he explains. “We decided that if we had to support our clients through business cycles then the best way is to reduce their fixed costs and make sure that their expenses can be varied based on the business need.”
Another such model is often referred to as value- or outcome-based pricing. Under this kind of contract, customers are billed not for time and materials but on the basis of a certain outcome, such as reduced transaction cost, accelerated time to market or improved customer satisfaction. Forrester Research analyst Liz Herbert writes that despite “challenges ranging from internal organisation hurdles to crafting the contract and agreeing on fair payment drivers”, outcome-based pricing models can deliver “significant rewards”.
One advantage of this approach is that the supplier absorbs some of the risk involved in outsourcing – if the desired outcome does not materialise, they don’t get paid.
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