It's just an open secret

Open book accounting is unlikely to tell you everything about your outsourcer's costs. Julia Vowler explains why true...

Open book accounting is unlikely to tell you everything about your outsourcer's costs. Julia Vowler explains why true transparency remains an unattainable ideal

Of all the words in the dictionary, the term "outsourcing" has alsways been a perenially controversial one. Can you risk a third party doing your IT, and will you get ripped off if they do?

Over the last few years the term "open book accouting" has come to the fore. The principle is simple. If you want to be sure you're not being ripped off by your out-sourcer, compare his invoices with what having your business on his books is costing him. If the delta is too yawning, get moaning.

But as Computer Weekly wrote recently about the 10 year outsourcing contract between Inland Revenue and EDS, open book accounting does not mean a risk-free environment.

"I used to be an absolute advocate of open book accounting," says Robert Morgan, chief executive of outsourcing advisory consultants, Morgan Chambers. Now he admits he's not so sure.

There are two main problems. Outsourcers can't and won't show tru costings to clients. "I've never seen a contract that's truly an open book," says Morgan.

It isn't surprising to find that a supplier is reluctant to reveal his costs to customers - it doesn't just apply to IT. But users should not be surprised, says Morgan, when their outsourcer skimps on details.

"On manning levels, say, you'll get told that someone is a category C manager, and his salary level is between £45,000 and £55,0000. You won't get any more granularity than that," he warns.

Outsourcers might also like to include their own costs of sale and marketing in the costs they pass on to their users. Don't let them, warns Morgan. "Only look at the cost for services delivered," he advises.

Outsourcers also like to confuse the issue by citing all sorts of internal costs - transfer pricing - across their organisational and geographical divisions, which muddy the clarity of the accounts. They also like to quote lots of industry generic figures for the current costs of technology. This last may be because of the second reason for only being partially open.

"You can't get the likes of EDS and IBM to reveal the cost of software licences becauseof thedeep discounts they receive from the likes of SAP and Microsoft," warns Morgan.

To do so would be in breach of their own contracts with software suppliers. The same holds for hardware. Increasingly, says Morgan, commodity items such as PCs are built to order - whole chunks of the production run of a new model will have been pre-purchased by outsourcers to diffuse out through their customer base. Users can end up in the frustrating situation of seeing their desktop machines for sale more cheaply in the retail high street.

Finally, warns Morgan, a client can discover that his account manager has not been told the true costs by his own head office.

"The account manager will genuinely believe he's cutting his wrists on the contract," says Morgan, "because he's not been kept fully informed by his management."

All in all, warns Morgan, "you will only get a degree of transparency" when it comes to discovering how much it is costing your outsourcer to do your IT for you. It can also depend on what you're outsourcing. The costs of running data centres, for example, are now well understood - Compass and Co can soon tell you yours, and whether you're doing it cost-effectively or not.

"Cost-plus pricing (for outsourcing data centres) has become generally accepted in the industry," says Morgan.

Conversely, for desktops, the sums are less predictable. Morgan points out that having a lot of power users, for example, can have a disproportionate effect. Change is, of course, where outsourcers make their money - especially when it is unforeseen and urgent. It is the frenetic pace of change at the Inland Revenue that has made the original billion pound bill from EDS soar to £2.4bn.

But it isn't, stresses Morgan, just a case of the outsourcers wearing the black hats. If open book accounting is to work at all, even in a limited fashion, then the users have to behave themselves too. Yet all too often they can renege on the deal, especially when new cost-cutting management sweeps into town.

"Accountants look for low hanging fruit," he warns. They see the data centre being run 12% more cheaply, and the desktops 27%, under outsourcing, and suddenly demand the outsourcer does even better.

"The bond of trust is broken, and the whole spirit of openness has been replaced," says Morgan. "The user community is not mature enough to handle the enormity of knowing what the outsourcing costs are."

So if, say, the cost of a technology decreases across the industry with Moore's Law, the outsourcer must be given sufficient time to bring down his charges to the user in line with the decrease.

"You must give the supplier time to course correct," urges Morgan. "You can't just say, 'I want to pay 3% less from today'. Don't take advantage of the published (technology prices) indices to the exclusion of all logic."

Also, be prepared that if you want to change your technology or your use of IT, open book accounting means it's your costs that go up - it cuts both ways, Morgan reminds.

In sum, "recognise that open book accounting doesn't suit everyone and may have a limited life if you are in a period of change," advises Morgan.

When it comes to scrutinising your outsourcer's accounts, you'll be looking through a glass darkly - but perhaps that's better than no glass at all. And if you really want to motivate your outsourcer to keep his costs to the minimum, let him put skin in the game. One user, cites Morgan, tied his outsourcer's fees to the user's stock price. As tighter and better IT impacted the user's cost base, so the share price increased and the more the outsourcer collected.

"Even if the outsourcer had a 50% gross margin I'd sign that deal off," says Morgan. "It's acceptable."

Of all the words in the IT dictionary, the term "outsourcing" has always been a perennially controversial one. Can you risk a third party doing your IT, and will you get ripped off if they do?

Over the last few years the term "open book accounting" has come to the fore. The principle is simple. If you want to be sure you're not being ripped off by your outsourcer, compare his invoices with what having your business on his books is costing him. If the delta is too yawning, get moaning.

But, as Computer Weekly wrote recently about the 10-year outsourcing contract between the Inland Revenue and EDS, open book accounting does not mean a risk-free contract.

"I used to be an absolute advocate of open book accounting," says Robert Morgan, chief executive of outsourcing advisory consultants, Morgan Chambers. Now he admits he's not so sure.

There are two main problems. Outsourcers can't and won'tshowtrue costings to clients. "I've never seen a contract that's truly an open book," says Morgan.

It isn't surprising to find that a supplier is reluctant to reveal his costs to customers - it doesn't just apply to IT. But users should not be surprised, says Morgan, when their outsourcer skimps on details.

"On manning levels, say, you'll get told that someone is a category C manager, and his salary level is between £45,000 and £55,0000. You won't get any more granularity than that," he warns.

Outsourcers might also like to include their own costs of sale and marketing in the costs they pass on to their users. Don't let them, warns Morgan. "Only look at the cost for services delivered," he advises.

Outsourcers also like to confuse the issue by citing all sorts of internal costs - transfer pricing - across their organisational and geographical divisions, which muddy the clarity of the accounts. They also like to quote lots of industry generic figures for the current costs of technology. This last may be because of the second reason for only being partially open.

"You can't get the likes of EDS and IBM to reveal the cost of software licences becauseof thedeep discounts they receive from the likes of SAP and Microsoft," warns Morgan.

To do so would be in breach of their own contracts with software suppliers. The same holds for hardware. Increasingly, says Morgan, commodity items such as PCs are built to order - whole chunks of the production run of a new model will have been pre-purchased by outsourcers to diffuse out through their customer base. Users can end up in the frustrating situation of seeing their desktop machines for sale more cheaply in the retail high street.

Finally, warns Morgan, a client can discover that his account manager has not been told the true costs by his own head office.

"The account manager will genuinely believe he's cutting his wrists on the contract," says Morgan, "because he's not been kept fully informed by his management."

All in all, warns Morgan, "you will only get a degree of transparency" when it comes to discovering how much it is costing your outsourcer to do your IT for you. It can also depend on what you're outsourcing. The costs of running data centres, for example, are now well understood - Compass and Co can soon tell you yours, and whether you're doing it cost-effectively or not.

"Cost-plus pricing (for outsourcing data centres) has become generally accepted in the industry," says Morgan.

Conversely, for desktops, the sums are less predictable. Morgan points out that having a lot of power users, for example, can have a disproportionate effect. Change is, of course, where outsourcers make their money - especially when it is unforeseen and urgent. It is the frenetic pace of change at the Inland Revenue that has made the original billion pound bill from EDS soar to £2.4bn.

But it isn't, stresses Morgan, just a case of the outsourcers wearing the black hats. If open book accounting is to work at all, even in a limited fashion, then the users have to behave themselves too. Yet all too often they can renege on the deal, especially when new cost-cutting management sweeps into town.

"Accountants look for low hanging fruit," he warns. They see the data centre being run 12% more cheaply, and the desktops 27%, under outsourcing, and suddenly demand the outsourcer does even better.

"The bond of trust is broken, and the whole spirit of openness has been replaced," says Morgan. "The user community is not mature enough to handle the enormity of knowing what the outsourcing costs are."

So if, say, the cost of a technology decreases across the industry with Moore's Law, the outsourcer must be given sufficient time to bring down his charges to the user in line with the decrease.

"You must give the supplier time to course correct," urges Morgan. "You can't just say, 'I want to pay 3% less from today'. Don't take advantage of the published (technology prices) indices to the exclusion of all logic."

Also, be prepared that if you want to change your technology or your use of IT, open book accounting means it's your costs that go up - it cuts both ways, Morgan reminds.

In sum, "recognise that open book accounting doesn't suit everyone and may have a limited life if you are in a period of change," advises Morgan.

When it comes to scrutinising your outsourcer's accounts, you'll be looking through a glass darkly - but perhaps that's better than no glass at all. And if you really want to motivate your outsourcer to keep his costs to the minimum, let him put skin in the game. One user, cites Morgan, tied his outsourcer's fees to the user's stock price. As tighter and better IT impacted the user's cost base, so the share price increased and the more the outsourcer collected.

"Even if the outsourcer had a 50% gross margin I'd sign that deal off," says Morgan. "It's acceptable."

This was last published in April 2000

Read more on IT outsourcing

Start the conversation

Send me notifications when other members comment.

Please create a username to comment.

-ADS BY GOOGLE

SearchCIO

SearchSecurity

SearchNetworking

SearchDataCenter

SearchDataManagement

Close