Why Indemnities Matter
Tips to Deal with Liability when Outsourcing to Multiple IT Vendors
Servers or Rabbits?For the past two decades, the mechanism for creating value in Infrastructure Outsourcing has been to push down hard on price — compressing the P in P * Q = Total Price — with the goal of creating as big a difference as possible between the buyer's existing unit cost and the supplier's unit price through lower labor costs and improved productivity.
Yet over the last several years, this approach has not created the value buyers are seeking. We are seeing a number of buyers whose unit costs are at or below the unit prices offered by suppliers, in large part because buyers have lowered their own internal unit costs through staff reductions and hiring freezes. Service delivery risk has likely increased, but we have yet to see a buyer quantify or price the added risk.
They Keep Multiplying!
At the same time, there has been no slowdown in the growth of Q. From servers and storage to routers and WAPs, every CIO is seeing hardware volumes increase. Server instances in particular are multiplying like rabbits! While virtualization has reduced the physical number of servers, it does little to reduce the number of instances — the metric by which suppliers are typically paid.
There are two sides to quantity: demand and supply. While it is fashionable to argue for demand-side control, we believe that businesses are generally efficient in demanding what they need, and that demand-side inefficiencies are insignificant compared to those on the supply side. Few businesses buy machines and expect to use them at 10% – 25% of capacity, or to make nine copies of every terabyte of storage. Those outcomes are the result of weak internal IT governance models and decision rights, poorly architected and developed business applications, and infrastructure organizations focused on satisfying demand without considering the long-term supply-side impact.
To really move the needle on Q, then, organizations need to look at new ways to control supply-side costs.
A Paradigm Shift is Needed
Pillsbury is helping clients leverage emerging supply-side opportunities to achieve major cost savings:
Automation: Some leading suppliers are challenging the traditional role of human labor in the execution of repetitive tasks tied to day-to-day IT operations. They are beginning to deliver on true automation – think robotic welding and automated assembly in modern car manufacturing compared to the labor-based production lines of 30 years ago. Automation is the natural next step in delivery of IT services and the impact is dramatic.
Application Stacking: Mainframes have featured application co-existence and stacking for years. Why can’t the same approach be applied to curtail the viral growth in x86 O/S images and the resulting expense? Suppliers that have the skill, execution-risk appetite and long-term market view (accepting lower current client revenues from reduced Qs in exchange for radical growth in market share) are emerging as leaders in IT delivery.
Real Resource Sharing: For all the talk of leveraging a supplier’s shared delivery solution across multiple customers, the fact is that most buyers demand “hard walls” between their operations and the supplier’s other clients. We help clients maximize the use of supplier-shared services where optimal and within the real (rather than perceived) requirements of their industry and business.Labor is not going to get any cheaper (suppliers will eventually run out of yet-even-lower cost countries) and human-based processes are only going to deliver marginal productivity improvements. Pillsbury can help you acquire the paradigm-shifting solutions needed to radically improve the cost of IT infrastructure delivery.