Building Elasticity in Outsourced Managed Services


There are always risks involved with outsourcing IT services, but this is especially true when outsourcing critical managed services such as infrastructure and application management support.  A common mistake organizations make when sourcing or negotiating a managed services agreement is focusing too much on the “here and now” and failing to properly preserve the health of the relationship over time as business objectives, scope of services, and volume will inevitably change. Managed outsourcing service providers take advantage of that.

The two most volatile aspects of any outsourcing deal are changing service delivery priorities and fluctuations in scope.  Service providers count on that and will take every opportunity to create change to service and scope throughout the term as each present revenue opportunities.  You can, however, safeguard your organization from unknown increases to costs or value erosion due to fluctuations in demand or changing services priorities by addressing two of the most misunderstood and underutilized concepts in your managed service outsourcing RFPs and negotiations.

Underutilized Concept #1: Cost Management Elasticity

We are often asked, “Why does it feel like everything is a change order?” The answer is almost always that it all comes back to the frameworks you established with your provider up front. Building “elasticity” into your pricing frameworks will materially reduce those far-too-frequent change orders.

When sourcing and negotiating an outsourced managed services contract, organizations typically focus on the cost of the current footprint or baseline.  That task alone of confirming resource unit quantities to build your baseline will consume the majority of your upfront efforts.  The impulse, all too often, would be to plug those numbers in to confirm your business case, align costs to current budgets, and move forward in getting your deal approved.

While this approach wouldn’t present material or immediate risk to the business case or the outsourced relationship as a whole, you’re still exposed to change and a great deal of uncertainty as to the cost of that change.  With the typical managed services agreement term lasting five years, there is a lot of time for unexpected changes to pop up.

Example #1:  Organic increases in resource units (servers) where scope increases organically

In this first example which isn’t at all uncommon, your server counts go up over time.  Nothing to worry about, right?  But wait.  What if you went from 500 to 750 servers under support and your costs went up 150%?  That’s linear so it makes sense, right?

Well, it actually doesn’t make sense.  Worse yet, many providers will invoke broad undefined rights to reprice the entire contract if you deviate from your baselines by as little as 10%.  That’s right, 10% growth (which for most companies would be a great thing) would create uncertainty to the cost and terms of your executed deal at a time when you need support even more.

To prevent this scenario, negotiate elasticity into your pricing model upfront with tiered pricing structures for all your high volume, high dollar support metrics (e.g., servers, storage, routers, switches, etc.) where growth above baselines drives per unit support pricing down in increments as you consume more.

Example #2:  Company consolidates offices by 30% resource units (WAN / LAN, email, phones, etc.) where scope decreases due to company consolidation

In this second example which is also not at all uncommon, your organizational realignment has now materially altered core volumetrics in your outsourced agreement.  Volumes went down as a result so costs should go down as well, right?  Not so fast.

The only real point of leverage to establish credits to services fees is during the negotiation process before the final down-selection.  Your only recourse if left unaddressed will be to renegotiate the entire agreement at a point when you have little-to -no leverage with your provider.

To avoid this, negotiate upfront for credits as you seek elasticity in your pricing models with tiered credit structures for all your high volume, high dollar support metrics to protect you from overpaying from a baseline when your volumes fall and stay below the initial volumes you expected.

When it comes to mission-critical systems and business operations that depend on uninterrupted service, organizations must make the initial effort to minimize their risk up front by establishing the flexibility to make changes down the road.  Building cost management elasticity into your agreement creates financial predictability for both you and your provider while preserving the business case for costs aligned to current volume as well as growth.  In addition, it can help you avoid getting stuck paying for excess services you’re not consuming or being hit with unpredictable and potentially disproportionate change order costs.

Underutilized Concept #2: Service Management Elasticity

I define service management elasticity as the ability, within the scope of your agreement, to establish, redirect and realign the focus of service delivery of your service provider.  Service management elasticity is as important as cost management elasticity and you’ll feel the effects when end users become dissatisfied with the services being performed.

Elasticity in services centers are around two key attributes of your services management framework.  The first attribute, customer satisfaction (or CSAT), is the most commonly sought when companies look to establish their Service Level Agreement (SLA) with their provider.  Among all the SLAs companies look for, the CSAT should be at the top of the list.  This is the heart rate monitor to the end user.  This single SLA will do more to draw attention to poor services than any other SLA as it represents an aggregate view of how end users feel about the services they receive.

The challenge, and where most companies don’t take the next and most crucial step, is to build elasticity into their SLA frameworks so when the CSAT scores indicate a potential problem, you have the tools and rights built into your agreement to address them without a change order.

Example #1:  A company wants to renegotiate an AMS services deal where they were extremely dissatisfied with the service they were receiving from their provider.  This proved to be a very hard sell with the provider as they had no CSAT SLA in their agreement and all SLAs were GREEN’s across the board for the past 18+ months.  The provider thought they were doing a stellar job and wanted exposure to more business.  The disconnect had grown so large that the parties could not agree on a path forward.   Had they had a CSAT metric they were measuring, they would have at least had the opportunity to discuss the disconnect between the service performance showing green and the dissatisfied end user.

This example only illustrates the point that service expectations change and that your service management framework needs to allow you to change with it – be elastic.  While the CSAT metric would have helped this client identify the disconnect earlier, the service level frameworks require even more attention than the SLAs when negotiating your outsourced managed services agreement with your provider.  You need to also negotiate a robust SLA framework that allows you to add, modify, delete, promote, and demote SLAs as end user needs and priorities change.

What should you measure?  Some companies think they need to measure everything.  At the end of the day, what you measure initially will change over time.  Having the framework in place to both identify the need to change and the rights to make that change positions both you and your provider to stay connected, add value, and maintain a healthy relationship.

Remember that five years is a long time and the only constant is change.  While today is certainly important, tomorrow can make or break a relationship. Plan for the future by building both cost and service management elasticity into your outsourced managed service agreements upfront.

Post a comment below, find my other UpperEdge blogs and follow UpperEdge on Twitter and LinkedIn. Learn more about our IT Service Provider Commercial Advisory Services.

Related Posts

Leave a Comment

*