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Gartner Outsourcing Summit 2003: SLAs, ESPs and you

Why is outsourcing such a hot topic? It's all about the money, at least right now. Lorrie Scardino, a research director with Gartner Inc., waxes outsourcing and offers advice on SLA re-negotiation.

Can service level agreements (SLAs) improve the relationship between IT and the business unit?
In my experience, SLAs are too technically focused -- they're not couched in business terms. To date, I don't think SLAs have been effective for the IT organization to show or prove their value to the business units, because the business units don't care about 99.99% of anything -- they want proactive management and the applications available when they need them. Typically, SLAs don't look at things like that -- they're not an effective tool for IT managers to prove value to the business. I did have one case recently where the IT organization kept getting better services from the service provider, and the service provider kept improving service levels. They were quite pleased, [thinking] 'we're doing such a great job,' but the business unit was getting more ticked off. They were complaining more and taking it to higher levels. They were getting more dissatisfied while IT and the service provider thought they were doing things better. The CIO decided to have a series of town hall meetings to find out what the business unit was looking for and then re-crafted the SLA. The SLA enabled the achievement of this business service level. Once that was in place, the business unit became much happier -- they weren't hearing about 99.99% of something -- they were hearing the things that were important to them. What is the difference between an external service provider (ESP) and a application service provider (ASP)?
An ASP is a type of ESP. When we use the term 'ESP,' we mean any service provider that is external to the enterprise –- it's a broad designation. Within that ESP category, there are various types of providers. It would be like saying you're going to stay in a hotel -- somewhere external to your home. Then within that you have a range: spa, resort, efficiency, drive-up motel. 'ESP' just means a provider external to the enterprise, and within that there are all kinds of flavors: ASP, offshore, system integrators, consultants, traditional outsourcers, providers, BPO [business process outsourcing] providers [and so on]. How often should you re-negotiate your SLA?
On SLA re-negotiation, we advise that service levels be an addendum to the contract, so you don't have to go back and revise the contract document per se, and you can look at the service level on an annual basis. We recommend looking at the service levels at least annually and ensuring [that] they're still delivering the business value that you intend. When you adjust service levels, it will adjust price -- sometimes not at all, sometimes a lot, sometimes a little. The vendor will take a line-by-line approach to see what effect it has on price. A lot of providers are getting the idea that it helps the relationship in the long term if they come to the table and say 'you know, we really could improve service over here and give you better service levels because we've introduced some efficiencies and new ways of doing this, and it will reduce the price you pay.' A lot of times, the vendor might try to make up that revenue somewhere else. For service providers, they take revenue very seriously, but they also take their relationships very seriously. In the past, they haven't been so willing to go and say 'we can do things differently, but it's going to reduce our revenue.' They just want to preserve the revenue they expected, whereas now I see changes in behaviors where a lot of providers will actually bring those things [cost-saving ideas] up. What is the latest trend working with service providers: multi-sourcing or sole-sourcing?
The dominant model is multi-sourcing. Clients, especially clients new to outsourcing, tend to selectively source -- like maybe all of their infrastructure or part of their applications -- until they get comfortable with the whole thing. Then, when contracts come up for re-negotiation or they think there might be some synergy they can get with leveraging –- say, if I put my help desk with my infrastructure I might get a better price -- they might leverage that into a bigger relationship with one provider. But most companies really do selectively source. Big companies, like Fortune 10, 50 and 100 companies, tend to look for one dominant supplier, and that supplier probably has a pretty involved network of people they work with, but even so, they'll have a dominant supplier for infrastructure up to and including applications and then use specialized resources for consulting and systems integration. What about the potential backlash a company could face for sending jobs offshore? How serious is the threat?
Within Gartner, you get several different opinions on this. I think it [backlash fear] is over-done now, and I think that it will settle down and become a non-issue. [Backlash] is necessary noise that you have to go through when you start to do things differently. People react to change or find reasons not to change. We got used to manufacturing jobs going offshore -- now that's the way it is. Today we're a services economy, and we're talking about services going offshore; that's the reason there's backlash -- because we're not talking about manufacturing anymore, we're talking about what we've evolved into. Tech jobs tend to be high paying. It's normal, natural and expected that there will be backlash, but I think people will get used to it.

Companies are buying these services either directly through offshore providers or through North American-based service providers. The reason they're doing that is to get a better cost, and you can't argue with that. If it costs $150 per hour here for something and $32 [per hour for the same service] somewhere else, you can't argue with it. Microsoft has been using offshore resources for development for years. Do you want to pay $79.95 for that operating system or $799.95? That's what we're talking about -- Joe Consumer influences this with [his] desire for competitive pricing. The same guy who sits there and complains about jobs going offshore is probably sitting there with a bunch of Chinese products in his house – so which way do you want it? Outsourcing is a hot topic these days -- all you have to do is look at the number of people at this conference. Why is interest so high?
Gartner has been covering sourcing for more than 10 years, and Gartner covers topic of interest to our clients, so 12 or 14 years ago there were one or two analysts, and they covered all different kinds of issues. Over the years, we've been adding [sourcing experts] because it's going up the value chain of what customers are asking about. From our standpoint, we live and breathe this stuff. When the economy goes down, outsourcing increases -- that's why it's gone thru the roof recently. We [sourcing researchers] are more in demand now than we ever have been. So when the economy bounces back, will outsourcing interest die down?
We're working on some scenarios now for the next couple of years. I believe that we're not going back. A company, once it outsources, is hard-pressed to make a case to bring it back in-house. There may be a period where there's modest growth when the economy picks up, but I don't think it's going to go back to 2000 levels. I think right now the emphasis is on cost reduction and vendors lowering their costs so they can compete. When the economy improves, the next wave will come in -– increasing market share, improving margins; we'll see an emphasis in a couple of years on consulting, system integration and higher value-added services. I don't think many service providers will be making investments today to be ready for that in the future, so we'll have a disconnect between what companies want and need and what service providers are able to give.


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