Navigating Corporations Towards Sound IT Sourcing Decisions
Exploring `97 Outsourcing Trends and Issues
A fundamental shift is taking place in the way outsourcing decisions are being determined today. Corporations have realized that they cannot abdicate responsibility for the use and impact of information technology within their organization.
Prudent companies are questioning the fundamentals about their own IT operations current situation before making an outsourcing decision. Companies are also starting to become much more aggressive in managing an ongoing outsourcing relationship. They further realize the relationship must be measured and contracts structured with penalties and rewards and, ultimately, a way out if the relationship does not succeed. Smart outsourcers are recognizing these changes and are looking for creative ways to work with their clients on a performance-based system criteria. In addition, outsourcers are no longer taking all business coming their way. If a company is well-run, an outsourcer may walk away from the business. Even in reviewing companies that are not well-run, outsourcers may turn away from the business if they cannot provide value-added services.
The Economy of Scale Assumption
Often, economies of scales are used to determine an outsourcing decision. They do exist in a data center environment, as shown in the cost comparison chart on page 14. However, it is not safe to make quick or simple assumptions. A well-run 400 MIPS data center can out-perform an 800 MIPS shop in an average monthly cost per MIPS comparison. In point of fact, over the last ten years, COMPASS has found some small data centers, on a unit cost basis, can outperform data centers 5-6 times their size. In theory, this should not occur; but in practice, better management can win out. Armed with this fact, the decision to outsource should not simply be a matter of data center size. We believe the real trick is being armed with where your company stands in a cost comparison. It should be noted that “best of breed” companies in each category outperformed anywhere from 5-25% below the average costs shown. (See chart.)
Monthly Average Cost Per MIPS* Comparison
In addition, you should be aware of the trend existing in data centers where average costs are declining overall by 15-20% annually. In light of this and the knowledge of the economies of scale, we commonly advise small data center clients (150 MIPS or less) that they should:
- Be growing in size
- Consider changing platforms to reduce costs
- Consider outsourcing their center
It should be noted that the current discussion covers a way to compare outsourcing all functions of a data center. Likewise, individual subprocess functions can be examined against costs at other similar size data centers. Many companies now are simply seeking to determine whether or not to outsource one or more functions such as enveloping, laser or impact printing, microfiche, tape operations, and help desk.
Our final advice for companies looking to outsource do not look to make quick or simple evaluations/decisions!! Remember that outsourcing negotiations usually take a minimum of twelve months to finalize. We believe the real trick is knowing where your company is in terms of “best of breed” performance and what your actual functional costs are. Armed with that knowledge, you will have an established baseline from which to negotiate should your firm decide to outsource. We will provide more insight and advice on “rules to live by” and how to use comparative analysis to structure a winning relationship with outsourcers in the next issue.
Who is Compass?
COMPASS is a multi-national consulting firm that provides their clients with a unique and proven method of determining and improving the cost and quality of IT operations. Since 1979, COMPASS has helped over 600 corporations in almost 4,000 studies navigate a path toward continuous improvement of their IT departments by the use of comparative analysis.
In this first of many articles, COMPASS America will share with InfoServer readers a brief overview of outsourcing trends and issues for 1997 and some hard information from its database on data center costs and the economy of scale assumption.