Companies outsourcing their operations analyze the benefit of the elasticity of the baseline resource deadband to determine the position that they may be better off in during negotiations and ongoing contract management.  The evaluation criteria weighing the predictability of the constant monthly cost with resource fluctuation against the ability to lower costs during a slow season is as complex as the provider selection process itself.  The deadband development is used by the company as well as the provider as a leverage point benefiting both parties’ interests.

The Customer
Customers attempt to game the deadband concept to manage provider costs.  While the large deadband may seem to benefit the customer, it can be a visage.  First, in a period of growth, predictability of monthly cost may be comfortable, yet the provider will have taken that into consideration with a larger base service charge to cover the variability.  In this situation, during times of decreased resource usage and business downturn, costs will not decrease in relation to the change in the business climate.  Therefore, gaming does not necessarily achieve the company’s desired benefit.

The Provider
The provider puts together its ARCs and RRCs based upon the variable portion for delivering a resource unit.  If it observes that there likely is a downturn in business, the deadband may be large due to the ability for continual coverage of its fixed cost of delivery.  This is referred to as “protecting the RRC.”  On the other hand, if the customer is in a growth mode, the provider may promote a small deadband to maximize revenue and profit opportunity.

Thoughts
ARCs, RRCs and deadbands only make sense when compared as to the competitiveness of the bids, market prices and their relationship to the base service charges.  Attempting to game deadbands is a two-edged sword for the customer, because the provider has an agenda as well.  The best approach to managing and lowering IT and F&A costs through sourcing is obtaining market-based pricing through the competitive bidding process and price benchmarking clauses in the agreement.    

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