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Industries:  General 

Infrastructure Services – Best Practices Followed while Outsourcing IT Services

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By: Aswin K and Haritha GK
Senior Analysts, IT Hardware & Telecom

calender08 Aug 2018

outsourcing-it-service

Introduction

  • The managed services market constitutes managed infrastructure, networks, mobility and security services. The global market for managed IT services is estimated to reach $256.5 billion in 2021 from $166.7 billion in 2017, at a compound annual growth rate (CAGR) of 11.5 percent.
  • Infrastructure services constitute the largest segment of the managed IT services market at around 45–50 percent of total sales, followed by network services and security services.
  • Organizations practice an optimum mix of in-house and outsourcing depending upon their industry and data criticality. Generally, the mix is 40 percent outsourcing and 60 percent in-house.

Multi-Vendor Engagement

  • Multi-vendor (bi-vendor) engagement is generally preferred by companies in order to reduce dependency on a single vendor.
  • Service bundling to a single/multi-vendor depends on the organizations’ decisions to distribute risk. Organizations expecting to share risk move to a single vendor, thereby reducing in-house dependency.

Global Suppliers, Local Engagement

  • Organizations prefer to engage with global vendors with wide geographic presence.
  • Key Benefits: Strong partnership with local suppliers and location advantages for setting up data centers.

Short Term Period (3 years)

  • Prices are very competitive owing to stiff competition between vendors, thus a short-term contract is helpful to renew the contract to latest pricing.
  • Fortune 500 (Fortune 500) organizations outsource close to 40 percent of their IT infrastructure and manage the remaining through an in-house IT team. However, with the increase in management complexities and high costs, the percentage of outsourcing is expected to increase to 65 percent in the next 3 years.
  • Organizations manage outsourcing vendors through effective SLAs and KPIs, which define the costs involved, services from the vendor, response times, completion dates, etc. They also lay out the penalties, if the terms of the SLAs are not met.

When should organizations outsource IT infrastructure

  • Sudden increase in support tickets
  • Significant decrease in DC/network performance
  • Visible indicators of equipment failure
  • Networking software failures

 

 

 

 

 

Challenges Faced by Organizations to Manage Infrastructure In-house

  • Unpredictable on-going cost of management and system upgrades
  • Cost of hiring and training dedicated personnel
  • High maintenance costs while implementing additional features, such as security, capacity and device management
  • Productivity depreciation when older versions of technology and applications are still running in-house
     

Optimal Percent of Outsourcing

Network Services

70–75 percent

Data Centers / Servers

65–70 percent

Mainframes

25–30 percent

Optimal Mix for Infrastructure Outsourcing

Optimal Mix for Infrastructure Outsourcing

Best Practices

Vendor Engagement Model: Bi-Vendor

  • Multi-vendor (bi-vendor) engagement is generally preferred by companies in order to reduce dependency on a single vendor. Ideally, companies engage with different vendors for different services, such as network services, DC services, voice and workplace services.
  • Key advantages: Minimize risks, avoid vendor lock-ins and reduce costs. It should be adopted by organizations with sound internal governance, else this will increase the complexity in multi-vendor integration and transparency.

Global Contract, but Local Engagement

  • Orgaizations prefer to engage with global vendors for managed infrastructure services with vast geographic presence.
  • Enterprises prefer the local vendor model in locations where vendors do not have capabilities to comply with local regulations or lack regional presence.
  • In some scenarios, global vendors also setup onshore delivery centers or establish local presence by partnering with local suppliers (sub-contracting).

Pricing Model

  • Per Device: The model involves a flat fee for each type of device that is supported in a customer environment.
  • Hence, the number of devices in the IT infrastructure determines the cost of outsourcing.
  • Per User: This model is the most flexible, where the organization pays based on the number of users.
  • Hence, if the organization’s employment levels change, it is easy to adjust investment. Through this model, organizations obtain the same level of service, irrespective of the number of users.

Contract Duration

  • Short-term renewable contracts are preferred by large organizations. Key Reasons: Fast evolving technology/landscape and to avoid vendor lock-ins.
  • Organizations engage in short-term contracts due to higher competitive pricing and improved quality of service. Thus, a short-term contract is helpful to renew the contract to latest pricing.

Advantages of Outsourcing Infrastructure Services

  • The exponential increase of data in Fortune 500 organizations and the rising costs of IT equipment have mandated a mix of in-house and outsourced data center strategies. Outsourcing is the only way to operate at peak efficiency, streamline costs and plan for future growth.
  • With outsourcing shifting to a different paradigm, organizations have even started to outsource security services in the last few years as companies look to outsource everything from monitoring of intrusion detection and firewall devices to watching access control lists and handling E-mail security.

Cost: Cost efficiency is one of the important reasons for organizations to outsource. Cost efficiency is derived from reducing or removing equipment, management, or staffing costs of an on-site data center. Outsourced infrastructure can easily realize up to 50 percent savings by moving to managed services.

Infrastructure Elasticity: Outsourcing provides organizations with the opportunity to gain more power and computing resources, and it offers diverse platform options, such as on-demand cloud, managed services and co-location. 

Data Center Reliability: IT downtime is one of the high cost elements involved in managing data centers. Managed service providers are fully equipped to achieve 99.999 percent uptime with the appropriate backup and failover in place. Outsourced IT is a viable option for organizations with significant data center failure rates.

Compliance and Security: Outsourcing vendors strictly adhere to government and industry regulations, such as HIPAA, Sarbanes-Oxley and PCI DSS. Managed service vendors are equipped with both security components, such as biometric scanners and coded access infrastructure alarms, and compliance standards as part of their standard package.

Disaster Recovery: Outsourcing vendors are well equipped with effective disaster-recovery infrastructure, such as backup equipment, cloud storage and multiple power infrastructures.

Considerations for Outsourcing Infrastructure Services

  • Access control and encryption methods that the vendors deploy.
  • Are the employees of the vendors subject to strict background checks?
  • Disaster recovery policies and procedures in place and case studies to exhibit disaster management capabilities.
  • How has the company responded to failures in the past, such as missed deadlines and missed requirements, and their failure measures?
  • Client visibility and transparency concerning vendors’ internal procedures.

Key Pointers for Services Bundling

  • It is advised for organizations to not select more than three IT vendors as this would result in increased complexity, thereby increasing costs.
  • Choosing an IT vendor with specialized experience, even if the vendor is smaller than competition, is an effective option compared to bundling services with vendors who do not have niche specialization.
  • Optimal mix of large and mid-size vendors: Large vendors bring in stability, best practices, support for mission critical applications and maturity, while mid-size specialized firms bring in competitive pricing, specialized expertise and agility.
  • Choosing vendors with an experience of working in the client country will enable smooth transition due to the familiarity in culture, social ethos, rules and regulations, etc.
  • Outsourcing is effective if the vendor acts as a partner and provides value added services, transparency and flexibility.

Service Bundling Options

  • Service bundling strategies in Fortune 500 organizations are not standard. They depend on multiple factors, such as risk, niche technical capabilities, flexible SLAs, geographical capabilities, vendor stability and quality of service.
  • It is always advisable for organizations to engage with specialized vendors. In case of a single-vendor model, organizations should be aware of the capabilities and strengths of any sub-contracted vendor of the supplier to avoid failures.
  • The following pictorial representation provides a clear understanding of the most suitable bundling options in today’s corporate environment:

Managed IT Services

Model 1:

Multi-vendor (Increased Control, Higher Risk)

Multi-vendor (Increased Control, Higher Risk)

  • Most of the times, the distribution of risk determines the choice between single vendor and multiple vendors.
  • Companies expecting to have more transparency, flexibility and control over the vendor, choose a multi-vendor model where they directly engage with all their vendors and determine service output.
  • This model is a cost-effective option as the service is directly obtained from the vendor and there is no intermediate mark-up.
  • Vendors tend to provide effective discounts for organizations in case of longer relationships.
  • Cons: Multiple contracts and SLAs to be managed.

Model 2:

Single Vendor – (Lesser Control, Decreased Risk)

Single Vendor – (Lesser Control, Decreased Risk)

  • Companies expecting to share risk forgo of the transparency and flexibility they obtain through direct engagement and engage with a single vendor who in turn sub-contracts with another vendor to provide niche services.
  • By adopting this model, organizations pass on risks to a single vendor and measure the performance through best in-class contracts, SLAs, KPIs and penalty clauses.
  • The model may not be as cost-effective as multi-vendor as IBM retains a mark-up for its services and does not pass all the benefits / discounts provided by AT&T.
  • Cons: Organizations may have to compromise transparency and control over the sub-contracted vendor.

Pricing Models

  • Pay per User and Pay per Device are the most widely used options in Fortune 500 organizations while outsourcing infrastructure requirements.
  • Nowadays, vendors prefer a newer methodology called SLA based pricing. This pricing model totally depends on the SLA, KPI, reporting methods, service credits etc. requested by the client. Hence, the cost incurred by an organization essentially depends on the criticality of the operation they require.
  • In an SLA based model, service providers charge more for organizations in a highly regulated industry, such as healthcare, where new laws are enacted that guard against data breaches etc. They do this to cover the extra expenses they incur on procuring additional infrastructure for compliance requirements (HIPPA).

Optimal Payment Terms

  • Organizations link the payment duration to the quality and timelines of the service provided by the vendor.
  • Most organizations fix the payment duration of 30–45 days, while some companies get a time period of 60 days due to longer relationships with the vendor.
  • The payment duration also depends on the negotiating capability of the organization and payment model practiced. For example, in a gain sharing payment model, pricing is based on the value delivered by the vendor beyond the typical responsibilities. Hence, if the vendor performs well, he has an upper hand during renewal negotiations.
  • Vendors cannot request the organization to lessen the payment duration in the middle of a contract.
  • Organizations can also negotiate for extended payment durations in their favor by outsourcing additional tactical/less-mission critical activities to achieve economies of scale, thereby creating a win-win situation.

Conclusion

It is always advisable for organizations to manage infrastructure outsourcing through a hybrid model to manage critical data. Dual vendor engagement is the most preferred model and organizations prefer to engage with global vendors on a local level with contract durations of 3 years.

 

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