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.
In the recent past, there were three clear levels of infrastructure outsourcing that were easy to understand: managed services, hosting services, and the new entrant, cloud computing. My prediction is the three have begun to morph into a single market that is now separated only by speed, access, and service levels. Each developed independently into very different, viable options in this now single market. Who would have ever thought GoDaddy, Rackspace and EDS would evolve and begin to slowly blur the lines on what IT outsourcing is?
Advances in technology hit industries in cycles. It may take a while for the entire industry to adopt, but ultimately they do. In today’s environment, many companies are facing an interesting dilemma: enormous pressure to improve their infrastructure (created by ever-quicker advances in technology) juxtaposed with equal pressure not to expend capital during a severe downturn in the economy. So even while capital dries up, entrepreneurs in companies large and small are creating the next “state of the art.”
We all know what happens to enterprises that fall behind in their basic infrastructure relative to their industry peers (Circuit City comes to mind—once a leader in retail information systems, it failed to keep pace with competitors). One of my clients had so many “antique” financial systems that its costs had ballooned to worst-in-the-industry before they outsourced F&A to consolidate and break dependency on unsupported software and outdated processes. If your business underperforms, accessing the capital to improve it becomes increasingly difficult, causing performance to deteriorate further. It’s a vicious cycle and it can take a company down.
About four years ago I attended a conference in Sao Paulo, Brazil where Michael F. Corbett, Chairman of the International Association of Outsourcing Professionals (IAOP), was speaking to an audience of CEOs about sourcing strategies. He cited a 3-Question Test that can help guide senior executives in considering sourcing as a management strategy. I give Michael all the credit for this vein of brilliance.
Question 1: If you were starting your business from scratch today, would you do _____________ (fill in the blank… IT, back office, HR, procurement, etc.) yourself? If you were able to start your business with a white sheet of paper, your first thought might be “what does the marketplace have to offer?” Look at it this way – think of yourself as a venture capitalist who is evaluating an exciting new companies’ business plan and the plan calls for the company to build out a new data center to get their IT established (I know… I am exaggerating to make a point). Is that where you’d want to invest and count on a big ROI? I think not.
