CenterBeam
Computerworld, 6/10/02: Wrangling Lucrative Deals With Integrators
By JAIKUMAR VIJAYAN
With cost a primary driver behind many outsourcing arrangements these days, a growing number of customers are shifting away from traditional fixed-price and time-and-material contracts to more flexible transaction and incentive-based pricing structures.
"There is a much greater sophistication in contract management and negotiations by users" than ever before, says Neal Dittersdorf, a partner at Washington-based law firm Venable, Baetjer, Howard & Civiletti LLP.
The most visible change in contracts with integrators is taking place on the pricing front, Dittersdorf says. Service providers are becoming more flexible in the way they package and price deals.
Driving many of the changes is the tough economic climate, says David C. Hollingsworth, director of enterprise applications at Watson Wyatt Worldwide, a human resources management firm in Washington.
"Vendors that were very cost-prohibitive for us in the past are coming back with completely revamped proposals to make sure they can at least get in the door," Hollingsworth says.
For instance, a proposal for a data backup service that Watson Wyatt previously rejected as too expensive became more palatable after the vendor recently offered the same service using a more cost-effective technology, Hollingsworth says.
Tumbling Rates
The slowdown in IT spending is putting considerable pressure on vendors to drop prices while delivering the same service levels as before, says Juergen Rottler, a vice president at Hewlett-Packard Co.'s services group.
Contract workers are settling for 20% to 30% lower rates for certain job skills these days compared with 2000, says Dan Hoffman, CEO of Digerati Solutions LLC, a Babylon, N.Y.-based systems integrator that provides engineering, desktop and project management contractors to financial services firms.
"Many [IT workers] have been laid off, so there's a surplus of resources. Companies are taking this as an opportunity to negotiate more extensively on prices," Hoffman says.
Customers are also beginning to more closely scrutinize the financial stability and viability of the companies they're interested in partnering with - not only before they sign on but also during the course of a contract.
"We are looking a lot more closely at vendor funding and stability," Hollingsworth says. This means a lot more face-to-face communications and insistence on getting details of new business plans and ventures.
Here are some other factors that IT managers and analysts suggest considering when negotiating contracts with systems integrators:
• There's no such thing as a one-size-fits-all pricing model. Be prepared to mix and match as needed and choose wisely.
It's an approach that Nielsen Media Research in New York is considering for a long-term application outsourcing project with Cognizant Technology Solutions in Teaneck, N.J., to develop a data management system.
In structuring the contract, Nielsen is breaking the project into three phases - development, enhancement and maintenance, says CIO Kim Ross.
The first phase will be executed on a fixed-price basis, while the other two are likely to be structured under a variable, transaction-based model. Both parties are trying to estimate the cost of ongoing enhancements and maintenance, he says. But "the future phases are not legally bound," Ross says. This makes the contract more open-ended and flexible for both parties, Ross says.
• Use service-level agreements and other quantifiable measures to make sure projects are being delivered on time and within scope.
Nielsen, for instance, uses a technique called Function Point Analysis for estimating project size, managing change of scope and communicating functional requirements with Cognizant.
Nielsen may give Cognizant a project to develop a system with 2,000 individual functional points to develop, maintain and enhance. It then uses productivity modeling tools to estimate project requirements.
The approach gives both Cognizant and Nielsen hard numbers to base pricing on and to measure performance against, Ross says.
• Have provisions that clearly spell out what happens to intellectual property and shared software and hardware in case a relationship has to end, attorney Dittersdorf says.
• When it comes to offshore outsourcing, choose the right applications to outsource and maintain constant communication with your vendor, says Jim Beattie, chief technology officer at CCC Information Services Inc., a Chicago-based provider of networking services to the auto industry. Projects that involve short lead times or a high degree of collaborative effort between different business units aren't the best candidates to ship overseas. Those projects with longer development cycles make more sense to send abroad, he says.
• Incentive-based pricing models benefit both parties. For instance, an outsourcing vendor that gets paid by the number of help desk incidents it responds to every month will have little incentive to reduce the number of calls it fields - even if that would ultimately reduce its customer support costs, says Steve Dauber, a vice president at outsourcer Center Beam Inc.
But under a fixed-price model, says Dauber, the vendor makes money only by designing out underlying problems and reducing the number of help desk calls - a scenario that benefits both parties.
Says Dauber, "Instead of paying for activity, pay for results."
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Outsourcing
Infoworld, 6/10/02: Rackspace unwraps Intensive Hosting
By Brian Fonseca
RACKSPACE MANAGED HOSTING introduced Intensive Hosting on Monday, its new proactive management and Microsoft platform exclusive hosting division aimed at wooing customers eager to shed expensive and services-heavy Digex customized hosting offerings.
Wrapped around a set of slimmed-down services it calls "ProActive7," Intensive Hosting is standardized on Dell servers. Rackspace will deliver deep support of Microsoft's suite of hosting applications and Microsoft .Net Enterprise servers including SQL Server 2000, Internet Security and Acceleration Server 2000, MOM, and Windows 2000's Active Directory Services, said Graham Weston, CEO of San Antonio, Texas-based Rackspace. Weston said Intensive Hosting is designed to leave customized duties squarely up to the customer and thereby slash outdated hosting practices and prices.
[more]
The Wall Street Journal, 6/11/02: Perot Systems Remains Optimistic Despite California Electricity Probe
By ELLIOT SPAGAT and GARY MCWILLIAMS
Nearly two years after taking the reins from his famous father, H. Ross Perot Jr. could easily claim Perot Systems Corp. was on the mend.
A series of acquisitions helped put the Plano, Texas, computer-outsourcing company in the black after a tough patch last year. Analysts predict double-digit revenue gains this year even as bigger rivals are shrinking amid weak demand for outsourced computer-services.
[more]
Giga, 7/10/02: Building Incentives Into SLAs for IT Services
The practice of including incentives for meeting or exceeding service-level agreements (SLAs) is not new, but increasingly, outsourcing contracts are incorporating elements of shared risk/reward or gainsharing, particularly where some element of “transformation” is involved. For infrastructure/operational outsourcing contracts (e.g., telecommunications and data services, network outsourcing, desktop outsourcing, midrange and mainframe outsourcing), where there is simply a transfer of responsibilities and assets, SLAs tend to be punitive in nature; if the defined service levels are not met, then credits equivalent to a certain number of days of service are deducted from that month’s bill.
[more]
IT Management
Giga, 6/11/02: Common Mistakes in Justifying, Demonstrating and Realizing IT Value
With economic conditions remaining tight, organizations are demanding business justification for most major IT investments. While such justification is not new for most departments, many IT organizations are unaccustomed to applying a financial framework to their decision-making process. In the course of reviewing the justification process at many organizations, a number of common mistakes recurred.
[more]
Gartner, 6/7/02: Good IT Asset Management Can Save You Money
Not keeping proper track of distributed computing hardware assets can increase costs by 7 percent to 10 percent a year. Enterprises should evaluate the quality of their asset management practices.
[more]
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