This means that the allocation of costs in the data center determines the future cost development.
What happens in a Partial Outsourcing situation when the customer owns the hardware and the Service Provider bears the cost for people, energy and premises?
The Service Provider who bears the cost for cost groups with a steady underlying growth will have to compensate for this cost in order to keep being profitable. Service Providers can use several different methods to stay profitable during the tenure of the outsourcing contract. Let me list some of these methods. Please keep in mind this example concerns partial outsourcing where the service provider bears the cost for people, energy and premises.
- The service provider will not accept fixed prices and demands a pricing model which reflects the true cost development. This model is difficult to achieve in a competitive market. In addition, the service provider has no incentives to improve his service.
- The service provider has already in his initial bid taken future cost increase into account. As with the previous option this is difficult to achieve in a competitive market.
- After taking on the contract the service provider will improve his operations in step with the underlying cost development. This is a tricky situation and it is questionable if it is possible to win a negotiation with such a big rationalisation potential only on people, premises and energy.
- With an increase in volumes of services and scale advantages the service provider can expect a higher margin on the additional volumes delivered. This might prove difficult in some cases. It is easier to deal with this situation if the data center is experiencing general growth. If the higher volumes were known during a competitive negotiation the prices would most likely reflect this by being lower. On the contrary, an unforeseen increase in volume will result in the service provider becoming expensive and appear non-competitive unless there is an adjustment in price.
- The service provider will be more strict in interpreting the contract and will increase his incidental charging to compensate for lowered margins.
Most outsourcing customers experience some of the above points. What is there to do? We see mainly three ways around this:
Include Hardware in the outsourcing deal.
By having control over hardware the service provider has the opportunity to increase quality in capacity planning, implement new technologies like virtualization and improve purchasing powers. This means the price / performance development of the industry can be followed with maintained margins.
Include how an increase or decrease in volume should be handled in the outsourcing contract
A risk with compensating the service provider for different changes is that if the costs are always covered there is no or little incentive for the service provider to suggest improvements to the service. The service provider will be reluctant to invest if costs are already covered.
Consider the service provider to be a consultant that will only do what is asked for
This requires the customer to keep control and knowledge to control or to buy that knowledge from another supplier. Increase in cost and demands on cost improvments through increased efficiency is removed from the service provider. Rationalizations and shifts in technology are evaluated and decided upon by the customer alone or with the help of a consultant. The service provider executes according to agreed rates. In this case the service provided has been offloaded all expectations to perform any improvements during the tenure of the contract. Expectations, roles and responsibilities will be clear.
(software is purposedly left out)The Service Provider who bears the cost for cost groups with a steady underlying growth will have to compensate for this cost in order to keep being profitable. Service Providers can use several different methods to stay profitable during the tenure of the outsourcing contract. Let me list some of these methods. Please keep in mind this example concerns partial outsourcing where the service provider bears the cost for people, energy and premises.
- The service provider will not accept fixed prices and demands a pricing model which reflects the true cost development. This model is difficult to achieve in a competitive market. In addition, the service provider has no incentives to improve his service.
- The service provider has already in his initial bid taken future cost increase into account. As with the previous option this is difficult to achieve in a competitive market.
- After taking on the contract the service provider will improve his operations in step with the underlying cost development. This is a tricky situation and it is questionable if it is possible to win a negotiation with such a big rationalisation potential only on people, premises and energy.
- With an increase in volumes of services and scale advantages the service provider can expect a higher margin on the additional volumes delivered. This might prove difficult in some cases. It is easier to deal with this situation if the data center is experiencing general growth. If the higher volumes were known during a competitive negotiation the prices would most likely reflect this by being lower. On the contrary, an unforeseen increase in volume will result in the service provider becoming expensive and appear non-competitive unless there is an adjustment in price.
- The service provider will be more strict in interpreting the contract and will increase his incidental charging to compensate for lowered margins.
Most outsourcing customers experience some of the above points. What is there to do? We see mainly three ways around this:
Include Hardware in the outsourcing deal.
By having control over hardware the service provider has the opportunity to increase quality in capacity planning, implement new technologies like virtualization and improve purchasing powers. This means the price / performance development of the industry can be followed with maintained margins.
Include how an increase or decrease in volume should be handled in the outsourcing contract
A risk with compensating the service provider for different changes is that if the costs are always covered there is no or little incentive for the service provider to suggest improvements to the service. The service provider will be reluctant to invest if costs are already covered.
Consider the service provider to be a consultant that will only do what is asked for
This requires the customer to keep control and knowledge to control or to buy that knowledge from another supplier. Increase in cost and demands on cost improvments through increased efficiency is removed from the service provider. Rationalizations and shifts in technology are evaluated and decided upon by the customer alone or with the help of a consultant. The service provider executes according to agreed rates. In this case the service provided has been offloaded all expectations to perform any improvements during the tenure of the contract. Expectations, roles and responsibilities will be clear.
