IT leaders are experiencing problems with cost-focused IT outsourcing (ITO) deals that were carried out during the height of the recession, and should look to tidying up their in-house operations in order to help providers deliver a better service for their business.
Research carried out by independent sourcing adviser, Alsbridge, which asked 250 senior IT decision makes from Europe’s most mature ITO markets (the UK, Switzerland, Holland and the Nordics), found that more than half (55 percent) of IT leaders signed IT outsourcing contracts under cost pressure during the recession.
However, some 43 percent have since reported problems with these cost focused deals.
John Sheridan, director and head of ITO at Alsbridge, explained to Computerworld UK that if companies are simply looking at costs to drive outsourcing deals, then they are going to run into difficulties.
“One of the reasons that we initiated this research was that we were concerned that the economic environment over the last few years has driven a number of people to address cost reduction, rather than address the service issues – the business issues they have,” said Sheridan.
“Whilst nobody has cost as their primary driver, when you scratch away at the surface it becomes a fairly significant part of the decision criteria.”
He added: “But, obviously, CIOs and IT leaders want to get a service from their provider that meets the needs of the business. The challenge is that if you only target cost, service providers will deliver a service for you, but they will deliver a level of service that may not be appropriate for the business.”
However, despite the increase in challenges experienced as a result of cost-based deals, a massive 84 percent of IT leaders said that they will attempt to drive down ITO costs further if they get the chance.
“I don’t think it’s impossible to get a service that is good quality and low cost, but I think there has to be a very different approach to driving cost out. It’s not actually about cost reduction, it’s about delivering services ITO services in a smarter way,” said Sheridan.
“It’s not so much about: please deliver this service for less. It should be more about: what do we need to do as a business to provide an environment within which you can deliver the most cost effective service to us?”
He added: “I’m not saying that businesses don’t accept responsibility, but I don’t think that they understand enough about their cost base, or understand enough about the business drivers to create the right profile of service for the business.”
Alsbridge’s ProBenchmarket data also found that ITO market prices have fallen significantly since 2010, which Sheridan puts down to the introduction of cloud technologies and the reduction the price of other technologies, such as storage.
For example, the data highlights that market rates have fallen by 25.7% on average, with the biggest reductions occurring in server (23%), mainframe (20%), telecom (43%) and storage (56%).
Sheridan argues that whilst this may give companies leverage to negotiate a lower price point, companies need to ensure that they are ready to take advantage of these new technologies, because otherwise they will be delivering a service that isn’t fit for purpose.
“If you want to explore a lower price point because cloud technology allows you to leverage some of those things – then what are you doing in other parts of your business to enable that change? You want to move into a virtual environment, but you are stuck with a bunch of legacy applications that don’t fit into that environment,” said Sheridan.
“If you want to reduce the footprint of the application, which means you want to go and switch off half of your application set, but have you structured the change programme within your business to convince them that they can let them go?”
He added: “These things don’t require supplier intervention, these are things that traditionally if you were managing your service in house, you would have to do. I think there is a reliance on the third party to deliver a cost reduction, when actually they can only do as much as their customers will allow them to do.”
Sheridan finished by saying: “IT leaders can never outsource accountability, and although suppliers could be doing a lot more, both parties have an obligation to work together to find the best price point.”
In a separate report that Alsbridge released recently, IT leaders across Europe expressed their dissatisfaction with one or more of their ITO contracts and almost all (99 percent) said that they would like to renegotiate or retender one of their deals.