Tip

Is the UK government right to ask suppliers to cut IT contract costs?

The UK government has asked 19 of its largest suppliers -- nearly all are technology companies -- to cut IT contract fees. The Efficiency and Reform Group, part of the Cabinet Office, has said it wants a £6.2bn reduction in government spending in 2010-2011. And the public sector will likely have a similar reduction goal.

But some observers have questioned the fairness of asking for contract variations on existing IT contracts when the scope of the work won't change. These changes raise questions about the nature of government IT contracts. Some question whether these contracts are too inflexible and stand in the way of greater organisational agility and adaptability. If the private sector can adjust, why can't government service providers?

Outsourced IT: Government as last stronghold
I speak regularly with corporate and public-sector CIOs. These conversations lead me to believe that the government's IT market is the last stronghold of the wholesale outsourcing service provider model, in which outsourcers take over systems run by centralised IT and charge a lower rate for delivering the same basic services. Sometimes referred to as the "your mess for less model"

Many private organisations have moved away from an outsourced IT service approach because other models offer greater flexibility in buying and deploying IT as a service.

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Many private organisations have moved away from an outsourced IT service approach because other models offer greater flexibility in buying and deploying IT as a service.

 

Neil Cresswell, managing director of Savvis EMEA,

 The needs of the public sector are the same as those in the private sector but more flexible contracts can meet those needs. Some of my company's latest infrastructure contracts apply to only an hour of work, proving that with the right infrastructure you can deliver massive flexibility.

Pure consumer models offer examples of these new ways to buy IT, such as hosted email and file transfer, which are now being adopted in the business world. Large and small commercial organisations have already exploited the new generation of IT services, government can to.

IT contracts and greater efficiency
Inflexible IT contracts are often justified by organisational complexity and scale, but businesses such as banks and insurance companies are complex and serve massive numbers of clients as well. The finance sector has adapted to take advantage of more cost-effective technologies. It has become open to dealing with managed service providers and adept at adjusting the role of its IT departments to become expert managers of third-party service companies.

IT teams are now more comfortable with buying functions such as email, customer relationship management and enterprise resource planning as a service and integrating them to best fit the business. Ten years ago, however, they would have hired a systems integrator and paid for integration and ongoing mark-ups on the component services.

People are mixing and matching to get the best elements for their IT systems, even down to using virtual storage for some noncritical applications. Moving to shorter, more flexible IT contracts is a natural part of this evolution.

People are mixing and matching to get the best elements for their IT systems, even down to using virtual storage for some noncritical applications.

 

Neil Cresswell, managing director of Savvis EMEA,

 I've heard many clients say: "We plan to use three or four suppliers, and we will manage all of you like this. …" Then they outline a process in which common contract terms, reporting and communication methods are used for the various suppliers. This gives the client the benefits of process efficiencies and access to flexible suppliers.

Given that flexible IT service provisioning is possible, is it reasonable for government to ask for fees to be reduced, even on existing contracts?

In my view, the answer is yes.

The government needs to seek technology combinations that enable contracts where cost reductions are automatically passed on as government efficiencies are gained and where scaling capacity up and down to manage fluctuations in demand is a fundamental part of the contract. For this to happen, IT suppliers should help the government smoothly transition to new ways of buying. Government itself needs to free up its IT teams to negotiate flexible contracts and to efficiently manage suppliers -- just as their commercial peers have learned to.

Neil Cresswell, is the managing director of managed hosting provider Savvis EMEA and a contributor to SearchVirtualDataCentre.co.UK.

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This was first published in January 2011

 

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