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IT outsourcing customers cling to cost-savings mindset

Stephanie Overby | March 16, 2016
IT leaders continue to focus on cost containment with their IT service deals, but in today’s business environment companies will have to spend money to save money, according to KPMG’s David Brown. Why is cutting costs via traditional IT outsourcing less likely today?  

Brown: It’s more difficult to leverage new technologies in conjunction with long-term, traditional deals and higher breakage fees. On the flip side, those that are taking advantage of cloud technology are reinvesting those savings back into other enabling technologies that will aid in other parts of the business but not reduce the overall IT costs. For example, automation requires spend with IT software vendors, but the savings are mostly outside IT. Cognitive investments are, again, IT-related, but the benefits are across the entire company. Investments in data and analytics require tools and third parties that fall within the IT budgets, increasing the IT spend. And lastly, the increase in third parties that need to be managed increases the overall governance costs [for IT].

If organizations are truly seeking “innovation” (which they first need to define before they can seek) then cutting costs becomes less of a monolithic goal. Cutting some costs but more importantly gaining new capabilities (for example via cloud flexibility or analytics insights) is a fair trade-off. The next wave of major cost savings will come via automation, but a lot of IT work has already been automated or passed to a third party. You noted that buyers seem cautious about models that include outcome-based pricing, preferring hybrid and fixed-price models (which accounted for some 95 percent of deal value over the last three years).  

Brown: We continue to see companies with fixed-price deals with some level of variable pricing to account for changes in volumes. [Our survey] found that there has not been much recent change in pricing models employed [over the last year and a half]. We do not see any reason for major shifts in pricing models in the next 18 months.

Clients are having conversations about outcome-based pricing. As an example, some are assuming that outcome-based means a share in the savings or outcome—similar to incentive fees. This is seen more on the business process side rather than IT. Others view the outcome as a holistic metric or combination of metrics that drive an outcome (for example, reduction in bad debt or collectibles). A challenge with this approach is that the outcome may be too high-level with many variables affecting the outcome not directly correlated to the service provider’s efforts. Isn't there more for customers to gain from business outcome-based deals?  

Brown: There is more to gain, but there is more risk. This has been the issue with these models for 20 years. Both buyers and providers like the reward, but not the risk exposure.

Even when buyers and providers can come to terms with a model for risk/reward or gain-sharing, it is difficult to contract and work into service levels. It is often in the contracting phase where these models unravel. Many buyers are also still concerned that they do not have adequate visibility into service provider operations and costs to fully vet the input to any models that are used to calculate gains.  


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