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Jean-Pierre Le Treut

Outsourcing

from "chasing the costs" to "seeking value"

by Jean-Pierre Le-Treut Outsourcing Business Development Manager

IT Cost reduction was always a central point of Outsourcing : when justifying a first externalization projects, renegotiating an existing contract or managing competition between two suppliers, arguing on reduction of IT recurring costs remains the booster. But Outsourcing and the evolutions with Cloud services are transforming CIO in value generator within their Company.

The various contributions of Outsourcing
Of course, thanks to the maturity of the market, outsourcing or « Managed Services » are highlighted by many promising values: access to best practices of the market, to standards, to the expertise, to the industrialization and innovation, reduction of time to market for new products or services, rationalization, flexibility and scalability. But at the moment of the final choice, those criteria will loose importance facing the direct contribution of Outsourcing on costs.

Costs ? Which costs ?
The apprehension of costs in the domain of Outsourcing strongly evolved during the 15 last years: from 1995 to the beginning of 2000, the issue was to lower costs, which supposed to have a baseline allowing comparing external cost with existing internal costs. This baseline requires to be able to measure its own internal costs. At this time (and still sometime nowadays), electricity costs (of the Data Center) are for instance charged to general services department and not to the IT department; same thing for telecommunications costs which are smoothed to all in the facility fees.
Management costs (managing internal teams or managing external contracts) were also rarely well identified.

In these conditions, the reduction of costs brought by one outsourcing operation could become difficult to prove or to quantify precisely.

The contribution of Managed Services
Little by little, financial models become more and more accurate and comparisons easier to build. Moreover, Outsourcing deals were diverse and simplified : we are more and more speaking about Managed Services or selective Outsourcing rather than global outsourcing contracts. Customer outsource functions (Help desk, infrastructure management , application management) to different providers selected on their specialization and specific know how in domain, the Customer having the role of integrator and prime contractor.
On such reduced and precise perimeters, identifying costs and wins is more accurate and relevant.

Since some years, the notions of Catalog of services and works items are bringing a new way of thinking to cost reduction.

First of all, provided that the content of each work item of the catalog is precisely defined (deliverables, level of services, pre-requisite….), comparing prices (or costs) of one elementary services can be done between two providers or between on provider and internally: cost of one ticket solved at the level of the Service Desk, yearly cost to administrate a server, cost to deploy one n-tier application in production ….

Pay per use is now possible
Moreover, using these elementary costs allows to implement a full and precise invoice based on consumed items during the period. The variability of the IT invoice depending on business needs is now possible, reconciling Business and the creation of value for the company with its transversal support operations and its costs.

Cloud Computing
Building a variable invoice is made possible thanks to two evolutions: on one side, the maturity of the recurring IT operations domain (elementary services are more accurately evaluated, identified through their content, workload and costs); on the other side, for IT beyond outsourcing, Cloud Computing is a new step defined by a pay-as-you-go model.
Automation Suites for Cloud are all structured on a portal exposing priced elementary items of a Service Catalog. These softwares embed an invoicing module where chargeback and billing features allow to automatically collect Service items which have been “consumed” during the period, to price them and to allocate global costs to various charts of accounts.

New constraints
This flexibility generates new constraints and opportunities: providers should industrialize and standardize in order to better mutualize their production facilities and share resources which are “consumed” in a variable manner by different customers. Providers must carefully manage their capacities in order to guarantee a perfect reactivity in answer to customer’s solicitations while managing the lowest level of “non-used” capacities.

Customers on their side must fully take advantage from this news facility: liberate resources which not more used or only used for comfort. A “cost killing” function must be established as well as an internal invoicing: presenting costs to business lines is the only way to force them to liberate resources.
Allocating costs to precise charts of accounts in the business lines will allow to get a better estimation of the global cost of one application, of one project or one new product: the contribution of IT to the business will gain in visibility.

We definitively enter a new phase of Information Systems which mixes technical features (Cloud, provisioning, orchestration, Service brokerage) and economical stakes (pay per use) : chasing the costs is finally evolving toward seeking for value.


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