Price transparency opens up outsourcing

In the face of increased market and financial pressures IT service providers are looking to ways to be more competitive through pricing and improved levels of service.

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In the face of increased market and financial pressures IT service providers are looking to ways to be more competitive through pricing and improved levels of service. They are also being pressured by their customers to provide more business-oriented solutions and greater transparency when it comes to costs and service level agreements, writes Paul Michaels, director of consulting at Metri UK

In response, outsourcers are developing a new generation of service catalogues with clearer pricing structures and more flexible provisioning options, in the hopes of winning back the competitive edge they need to survive current economic challenges

Cutting through the fog

One of the persistent complaints of organisations using IT services is the lack of pricing & service transparency of their outsource providers. There are several contributing factors to this including the complex way in which supplier contracts are presented to the customer and the often arbitrary way that services are bundled together which makes it difficult to compare the price of individual service components with competitive offerings on a 'like-for-like' basis. As a result of this blur, clients assume - accurately or not - that they are paying more than they should but don't have access to the information they need to prove it.

Revisiting service packages

For their part, suppliers (whether external service providers or corporate IT support for internal clients) may be aware that their pricing structures are not competitive, but have either never informed their clients of more cost-efficient options, or do not themselves know where greater savings (or service improvements), or 'right-sizing' can be achieved. For example, a service level agreement (SLA) may include a platinum level service with 24/7 on-site support where a bronze-level service, 9-to-5 telephone helpline service would suffice. Or the provider may be required to maintain an overly complex - and therefore expensive - legacy infrastructure that would actually benefit from standardisation.

Customers demand market data

Over the past year or so, fuelled by the frustration of not feeling in control and further driven by recent credit-crunch induced pressures to reduce costs, corporate IT departments have been tearing down this curtain - or information barrier - between themselves and their outsourcers. CIO's are becoming increasingly self-educated and want to know exactly what they are getting, how much they are paying and how it compares with other offerings.

The danger to service providers is that if their competition is providing more open pricing detail to meet market requirements, those who withhold, or simply don't possess, sufficiently comprehensive information are on a collision course with customers who are sourcing data from either specialist consultants or the marketplace and may use it to challenge their providers.

Challenging supplier costs

Why, for example, should one service provider price their email service at EUR15 per user when another is charging only EUR5? There may, in fact, be valid reasons for the spread according to factors such as different corporate cultures, IT platforms, varying complexities of an enterprise configuration (a small, single-location company with a hundred employees and low turnover vs. a multinational organisation with thousands of staff and a high turnover) plus a host of other differentials and quality of service deliverables.

Given that suppliers and clients typically have a different view about fair pricing, the truth is usually somewhere in the middle. In these cases, either side may seek arbitration from an independent benchmarking consultant who can provide comparative market prices, explain the components that impact cost and suggest efficiency options that will benefit both parties. A specialist may, for example, suggest that it is more cost efficient for some IT support to remain in-house, or that functions that are currently internal should be outsourced.

Transparent service catalogues

To combat these challenges presented by today's savvy customers, service providers are being forced to respond by building more transparent service catalogues with more clearly defined pricing structures and a far greater degree of service component granularity that drills down into the various elements of, say, Desktop Support, which includes both Productivity software (e.g. MS Office) and enterprise (CRM, ERP, billing, inventory, etc.) applications along with hardware, connectivity, peripherals etc.

One of the first challenges in creating such a service catalogue is to have a clear idea of current market services & prices. Given that many service providers don't have access to this type of information - which may require knowledge of pricing structures across multiple global locations - their first port of call is frequently to embark on a study with the help of a benchmark specialist in order to determine if their prices, Service deliveries and service levels match their peers. And where they do not, to find out where prices or service bundling may need to be re-visited.

Commoditisation of services

In parallel with new service catalogue developments, there is an increasing trend towards the commoditisation of IT support services like enterprise Email, Storage and the Helpdesk, to create more standardised environments. This commodity approach is changing user behaviour, making it easier to pick and choose and order just those components needed at any given time.

Looking for margin

These trends to pricing transparency and commoditisation, which makes it easier to compare market prices, is putting immense strain on supplier margins. No longer can service providers simply apply an across-the-board uplift of 30% on top of cost. Rather, they must look to increasing margins by reducing costs.

This can be done by working smarter through initiatives like relocating service centres or software development offshore, creating a more stable and standardised IT platform, or by optimising existing equipment with new technology & techniques such as virtualisation.

Ultimately, of course, competitive edge is determined as much by the quality of customer service as by price. Perhaps ironically, the provision of a more transparent service catalogue, while it exposes suppliers to market comparison, offers just the kind of value-added service that builds trust and wins customer loyalty.

This was last published in April 2009

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