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Get more value from outsourcing agreements with outcomes-based contracts

By Saurabh Kumar, Managing Director at In2IT Technologies South Africa

Information Technology (IT) has become an essential enabler for today’s business, from supporting fundamental business processes to providing platforms for innovation and transformation. Without effective IT, organisations can no longer compete as they will be unable to meet evolving customer needs, enter new markets or deliver superior service levels. However, while IT is essential, it also adds layers of complexity, and many organisations simply do not have the skills or budget to manage in-house. Outsourcing various elements within IT services and solutions has therefore become a popular option, however, contracts often fail to deliver on expectations. Outcomes-based contracts have emerged to counter this challenge, adding value while delivering the skills and expertise required.

The challenge here is that outsourcing contracts are typically based on hours worked and not services delivered. This means that many organisations have failed to leverage full value from their outsourced services. An alternative model of outcomes-based outsourcing contracts has emerged in light of this, delivering greater value by linking outsourcing objectives to outcomes instead of man-hours. Customers therefore derive greater value from the service, while still leveraging all of the benefits of outsourcing as an IT procurement model.

The majority of traditional outsourcing contracts are based on the same principle of a Rand value assigned to hours worked. In other words, resources with appropriate skills are billed according to their competencies and experience on an hourly basis. Organisations will have a contract that specifies their ability to access a certain number of hours from a certain level of skill on a monthly basis. This is a low risk approach for the service provider, as the customer ultimately has the ownership of the project and associated deliverables.

The problem with this approach is that it can result in delayed deliverables as well as additional incurred costs. For example, if an organisation has reached its maximum hours for a certain skill level for the month, they will not be able to access those resources until the next billing cycle. Such an approach also tends to limit collaboration and lead to a lack of innovation as a result of customers being unaware of how best to leverage their technology for business value.

Service providers, who are experts in the technology they provide, are well positioned to assist organisations to leverage innovation in terms of the way services are delivered or the way they are utilised. As a result, certain forward-thinking providers are now offering a new model of outsourcing–the outcomes-based contract. Instead of clients requesting appropriately skilled resources for a specific task or project and being billed for the number of hours taken to complete a project, businesses specify the outcome they wish to achieve. The outsourcer will then provide a service aimed at achieving this outcome.

In addition, as this model is based on risk and reward, it creates a win-win scenario for both the outsourcer and the customer. For example, if a bank spends a significant amount of money on quality assurance, they may wish to optimise this spend using an outsourced service. In an outcomes-based contract, this reduction in spend will be the driving factor. The outsourced provider will therefore ensure solutions are implemented to minimise the time spent on quality assurance without compromising quality. If the specified reduction over time is realised, the contract will often state that additional remuneration, linked to this reduction, is awarded to the service provider. The service provider therefore makes more money, incentivising them to deliver better services. However, as the customer is achieving greater value from this service, they are effectively not paying any additional sum of money as a result.

There are many models of outcomes-based contracts that can be tailored to suit the various and complex needs and requirements of an organisation. For example, they can be linked to improvements in people, process and technology, or to the revenue of the organisation, or to service improvements delivered. There are also many other benefits to be achieved from adoption of this model. However, since these contracts are intrinsically tied to business outcomes, organisations need to ensure they identify the optimal outcomes desired from the beginning. Without adequate understanding of the business and its needs and the way in which it operates organisations can become tied into contracts that do not deliver value. Business outcomes must be clearly defined, and service providers empowered to complete through due diligence, to ensure that the right business outcomes are identified and that steps can be taken to effectively achieve them.

About In2IT Technologies

In2IT is a global technology services firm focused on providing IT Consultancy, Cloud Computing, Business Process Management, Managed Services, Application Development and Maintenance, Technology Infrastructure Services, Programme and Project Management as well as Future Edge Services to its Clientele. We constantly drive towards anticipating the rapidly changing technology landscape and the impact on clients.

We are technology practitioners who work along with our customers to help streamline processes, ensure optimal usage of deployed solutions and deliver a high performance customer-centric service. We are driven by a passion to build innovative businesses for our clients. Our experience shows that if we serve our clients well, our own growth will follow. With more than 80 global customers, we strive to be the first choice for world’s best talents. Through our Internal In2IT Academy, we are committed to continuous learning and giving our practitioners freedom to innovate.

In2IT is present across 9 cities in South Africa with more than 60% of staff complementing as local nationals. We have an Africa Innovation Centre in Sunninghill, South Africa focused on Social Media, Mobility, Analytics and Cloud (SMAC) and Remote Infrastructure Management (RIM). In2IT is a CMMI Level 3, ISO 9001:2008, ISO 27000 and ISO 20000-1 certified company.

Editorial Contact:

Saurabh Kumar |MD South Africa and Global Sales Head In2IT Technologies South Africa Tel: 073 080 8081 Email: saurabh@in2ittech.co.za Evolution PR Syreeta van Rooyen Tel: 011-4620628 Email: syreeta@evolutionpr.co.za