Outsourcing or managed services arrangements are often driven by concerns over the retention of internal skills but mainly around perceived cost savings and improved efficiencies. The question one must ask is whether these contractual arrangements ever deliver on the promise and can IT efficiency and managed services actually co-exist?
The fact is that traditional models of outsourcing are not conducive to promoting IT efficiencies. Whilst on the face of it, outsourcing initially reduces costs and improves services through a more efficient outsourcing vendor, over a period of time; the service in many instances becomes more expensive. Why is this case?
The simple answer is that outsourcing and managed services vendors, like any other IT organisation are in business to make money. In the first instance efficiency gains are not always passed on to the end user, but furthermore, due to the way that contracts are constructed every little addition, for example installs, moves, additions and changes (IMAC’s) come at a cost.
Outsourcing agreements are also typically structured and charged using the concept of baselines, for example supporting 100 servers will cost you X. So if you introduce efficiencies to reduce the server estate, typically the outsourcer will lose out as they have less to manage. The baseline is reduced and hence the revenue stream goes down.
Surely in tough economic times, rightsizing your IT and reducing your costs has to be paramount from a strategic perspective. Surely your strategic partners should be helping you reduce your costs through innovation and increased efficiency. This is often not the case. Your service providers often design for inefficiency to protect their revenue streams. The dichotomy is that in your eyes, less is more, but in the eyes of the managed services provider, more is more!
At a macro level it will come as no great shock that the IT industry in general does not focus on figuring out how to spend less on technology. This would be counter intuitive. There are however some progressive vendors such as 1E and Apptio who are promoting products that provide the information and tooling needed to help you right size the organisation but these vendors are certainly in the minority. Improving efficiency and reducing cost as a practice is not promoted by vendors who will lose out on revenue streams.
In general, we also seem to have a herd mentality rather than focusing on innovation and efficiencies and this herd instinct can be very powerful. Staying with commonly adopted systems, designs and processes helps to justify our decisions and strategies. Microsoft, IBM, Oracle, SAP, and the usual suspects made lots of money based on the maxim that nobody is fired for implementing what everybody else is using. But is this approach always right when we are cost constrained?
Unfortunately when we examine the latest hype cycle, namely the cloud, we may experience similar problems. Although on the face of it the cloud should be more cost effective and more efficient, it is very possible that cloud usage may in fact increase costs.
This can occur in one of two ways. Firstly through inefficient design (sound familiar) of either public or private cloud infrastructure. Secondly, a typical cloud model promotes savings based on usage, in other words the more you use the cheaper it becomes per unit. From an overall cost perspective the opposite is often the case. We utilise more units because they are perceived to be so inexpensive and hence costs go up. Weren’t we supposed to be paying less in the cloud? This cost dichotomy is known as Jevon’s Paradox.
So can managed services, by extension ‘the cloud’ and IT efficiency co-exist? These are surprisingly strange bed fellows and relationships need to mature to embrace efficiencies within a managed services construct.
Your real partners are those that are willing to identify and implement true efficiencies and pass these cost savings on to you. In this instance the opportunity is to use these savings to increase business value elsewhere for the same money. Most clients are more than happy to pay more for more value. It will come as no surprise that this is not the case when they are paying more for the same.