Outcomes-based contracts drive greater value from IT outsourcing projects
By Saurabh Kumar, Managing Director at In2IT Technologies, South Africa
Outsourcing is an increasingly popular model of obtaining essential IT services. However, one of the biggest frustrations for organisations making use of outsource partners is the way contracts are structured. In the vast majority of cases, technology contracts are priced based on effort, or the number of man-hours required to deliver services. While this model may have worked well in the past, the complexity of IT environments as well as the need for agility has increased dramatically, which means that often it is difficult to accurately predict the effort involved in delivering effective services. This has downsides for both the customer and the outsource company, and can lead to frustrations for both parties involved. As technology implementations become increasingly intense, a new model of outsourcing contracts has emerged based on ‘risk and reward’. Outcomes-based contracts, where pricing is based on uptime and services delivered, ensures value for customers and fair revenue for providers, creating a win-win scenario for modern IT implementations.
In South Africa, more than 90% of outsourcing contracts are based on the traditional model of effort and reward–providers will define how much effort they feel will go into a project, and will price their services based on this predicted effort of man-hours. However, this model presents a number of issues in the current market.
Many vendors make use of third-party suppliers who do not know the customer and therefore cannot accurately judge the effort required. In addition, this model follows the typical ‘command and control’ protocol, where the customer outlines a requirement and then requests the vendor to provide the necessary hours. This inhibits the vendor from being able to add value through their inherent experience and full depth of service. It also prevents collaboration between the supplier and the customer and places all of the risk with the customer. Furthermore, frequent delays are experienced with the completion of projects as well as rollouts.
This model has a number of downsides for the outsource partner too. It is common for outsourcers to underestimate the scope of a project, which can result in poor time planning and loss of revenue. Outsourcers that are commissioned specifically for a project are also restricted according to the contract, and thus are often unable to add value through their skill and experience. As a result of these and other challenges, outcomes-based contracts are increasingly being investigated as a mutually beneficial alternative for outsourced services and solutions.
Outcomes-based contracts, as the name suggests, are linked to defined business outcomes, instead of defined project objectives. Customers define the business outcome they wish to achieve, whether this is improved cost effectiveness, enhanced agility or other business outcomes. There are a number of variations on this model, however, in most instances services are then delivered based on this outcome, and the contract is structured according to the intensity of the IT services required. Some contracts may have a base fee and then additional remuneration for efficiencies delivered, or for additional functionality that can then be resold to the customer’s customers and so on. The fee structure often depends on the business outcome required as well as the provider and the requirements of the customer.
The pricing of the contract can link IT operational expenses with the organisation’s revenue, which offers additional incentive for the outsourcer. For example, if the technology provided adds value by enabling additional revenue streams to be generated, profits will increase, and so will the pricing of the contract. Outsourcers are thus driven to innovate, understand customer requirements better, align their services and provide additional value. Customers benefit from efficient and effective IT services linked to their revenue, so pricing will decrease should their revenue and affordability decrease. In addition, customers can take advantage of IT services from a company that fully understands their requirements, and that are guaranteed to add value and improve their business.
Outcomes-based contracts can benefit any business, but most particularly the medium sized enterprise that is looking to drive cost benefits, improve operational efficiency, align IT to business and take advantage of new technologies such as the cloud and mobility. This contract model is seeing growing adoption across the world, and is set to increase in popularity in the South African market over the course of the next two years as IT increases in complexity. Organisations wishing to take advantage of its benefits should look for a provider with global operations and experience in this type of contract delivery to instil confidence and ensure delivery of value.
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.For details on the company logon to www.in2ittech.com.
Saurabh Kumar |MD South Africa and Global Sales Head
In2IT Technologies South Africa
Tel: 073 080 8081
Syreeta van Rooyen