In today's fast-moving business environment, outsourcing is a key weapon in the battle to keep pace with technological advances and deliver effective, cost-efficient IT services.

By partnering with a specialist managed services provider, savvy companies and public sector organisations find that they can create a rich pool of internal and external resource to provide the right expertise, at the right time, at a manageable cost.

But no organisation should contemplate handing vital IT systems and services to a third party without having a true understanding of what those systems and services provide to the business and how much it costs to run them in-house.

Or, as Piers Harrison, a managed services specialist at Logicalis, puts it: "You've got to understand where you are now in order to decide where you need to go."

That requires organisations contemplating a managed services contract to ask themselves six key questions:

What is our current cost base?

No company can expect a managed services provider to deliver cost savings, unless they fully understand the capital and operational costs incurred by IT. These include: staff, equipment, software, accommodation, third-party suppliers, electrical power, communications and so on.

What service levels do we need to meet?

Some systems need to be fully accessible and offer reasonable response times, from Monday to Friday between the hours of 8.30am and 5.30pm. Others may need to operate on a 24 x 7 basis; for example, an online banking system. The component costs of an outsourcing contract can vary dramatically depending on the service levels committed to in the contract.

What is our IT asset base?

Many companies simply don't own and maintain a comprehensive inventory of all the IT equipment, including both hardware and software, which they use. An accurate asset register is an essential base point for the initial negotiation and ongoing management of a managed services contract.

What third-party maintenance agreements do we hold for that asset base?

If a system goes down, who is responsible for ensuring that the relevant supplier is contacted for help? It may be the managed services provider, or it may be the organisation itself. Either way, this needs to be decided upfront, if problems are to be resolved quickly and with minimum confusion.

What are our accommodation costs?

Housing IT staff and equipment can be a costly affair. They may be kept on company premises or moved to those of the managed services provider, with a margin and administrative cost added - but the best option can only be decided by comparing the costs involved.

What are our staffing costs?

These fall into two categories - the costs associated with the application and infrastructure teams working on systems development projects; and those associated with the operational staff that keep them up and running. It is vital to understand what these costs are, so that the price for the outsourced service can be compared accurately with current costs to facilitate sound decision making, contractual negotiations, and on-going contract management.

Your Comments and Questions

Gary Edwards, 5 months ago

Hi Piers, thanks for your helpful and in-depth response. Would I be right in taking from your response that having a solid IT asset management programme in place is good all-round best practice, whether planning for outsourcing or not?

Diana Lewis, 5 months ago

These sound like good IT management best practices. But while I would accept that knowing what third-party maintenance agreements you've got in place and similar responsibilities are the job of the IT manager, I would have hoped part of the managed service provider’s role might be to help me answer some of the questions above - such as what is our IT asset base - through its strategic consultancy and other analysis. Or am I simply expecting too much of my provider?!

Piers Harrison, 5 months ago

Hi Gary. The point you raise is very valid, and draws us to the issue of a customer balancing the need to have all the information necessary to make an informed decision, with the posssible expenditure of resource and cost to collect that information. The extension of this issue, however, is that failure to have an accurate view of current costs to benchmark against can contribute to incorrect decisions being made, or at least incorrect expectations being set as to the commercial value outsourcing may bring (which should, of course, only be a part of the decision criteria). I would note that the complexity of understanding the cost base generally matches the complexity of the managed service - for an out-tasking project (such as service desk or proactive monitoring) the effort should be minimal, whereas for a wholesale outsourcing project the effort may be correspondingly higher (the topics described in the article above are very much geared to such projects); the latter reflects the significant strategic and financial investment that an organisation would be committing to in contracting to an outsourcing agreement. Through the budgeting process, organisations will have a firm grasp of their staff costs, and it is often the 'hidden' (indirect) costs which are harder to uncover, or even indeed the asset data. In the case of the latter, we frequently come up against situations where customers do not have a (sufficiently) detailed view of the assets they have deployed in their IT estate; in those cases, assumptions are often made by both parties in the early stages, with that data being validated during due diligence. The supplier may, for example, include performing asset or site audits within the cost of their proposal. In summary, I would recommend an organisation consider what categories of cost are really necessary in order to benchmark the price of an outsourcing contract (staff, assets, etc.), what information is already available in each category, and the most practical method of collecting any information which is not available. If it is not practical to obtain that information, then assumptions must be made and clearly stated to the bidders, on the basis that due diligence will be required to validate those assumptions, and that a cost will be associated with doing so. I would reiterate that the depth of detail mentioned in the article relates to full outsourcing, and so for operational managed services and out-tasking services, the effort should not be as great.

Gary Edwards, 5 months ago

Hello Piers, interesting points. I wonder though, whether such an audit is so time-consuming - given the time-pressured environment in which today's businesses operate - that organisations might need to consider outsourcing this initial cost audit to a third party ?! My point is that this is no trivial project in itself, so can you provide any advice on how an organisation should go about such an initial cost audit? Thanks.

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