Prevent your outsourcing costs spiralling out of control with a fixed service fee approach

By Gerrit-Jan Albers, Service Delivery Manager at RDB Consulting

Managed services are becoming increasingly popular in the South African market as many businesses look towards models that eliminate the need for investment in technology whilst outsourcing non-core functions to specialists. However, the typical per hour billing method for consultants means that these costs can spiral out of control if they are not tightly managed. This has resulted in a growing trend towards adopting a fixed service fee approach to managed services. Using this approach, outsourcing costs remain constant throughout the contract duration and service levels and hours are agreed up front, ensuring that the cost of managed services never outweighs the benefits.

Managed services have gained traction largely as a result of increasingly strained IT budgets, combined with the ongoing skills shortage in South Africa. Organisations looking to harness scarce skills for non-core functions that may not warrant full time employment often look towards outsourcing as a way to leverage these skills without paying the salary required to maintain these in-house. However, the traditional model for such a service is to pay per hour, and everything is charged. If the consultant is required after hours, the fee becomes even higher. Ultimately, outsourced services can end up costing a lot more than anticipated, and the cost can outweigh the benefits.

As a result of this, organisations are increasingly looking towards a fixed service fee for managed services, where services are bundled together in an all-inclusive contract. Using this model, all service fees are calculated up front and key performance indicators (KPIs) are laid out to ensure that needs, costs and levels of service are agreed upon from the start. This eliminates hidden costs. The fee structure can also be reviewed should the organisation’s needs increase or diminish, ensuring that outsourcers are still delivering optimal levels of service.

This model is particularly appealing to the Chief Financial Officer (CFO) of an organisation, since managed services can be more easily factored into the organisation’s budget. The result is that there are no surprises or price spikes at month end. It also enables easier, faster access to service, since purchase orders do not need to be signed and approved for after hours work. This then results in better service delivery and faster turnaround on problem resolution.

However, the very nature of bundling all-inclusive services at a fixed cost can prove problematic for both the customer and the service provider. If the customer does not select a reputable service provider with experience in the market, who can provide the correct balance of cost versus service, they may end up paying a far higher price for services they are not using. If the service provider does not accurately estimate the level of service required, the resources required to service the client may prove to be far more than anticipated. This requires sound industry knowledge and experience.

In order to provide the best levels of service for both parties involved, planning is vital. If the organisation does not plan upgrades, migrations and so on, it becomes difficult for the service provider to accurately gauge required service levels, which can lead to compromised service. Ultimately the onus is on both parties to do their homework, assess the situation and ensure value for money is being realised.

For the service provider, it is vital to conduct a thorough evaluation and audit of the environment and take into account that the client’s needs often change after the first few months. For example, initially the client may need a full team of resources five days a week for two months, however, once the environment is sustainable and maintainable the requirements may decrease to one resource once a week. This cost needs to be factored into the contract and spread over the duration in order to ensure the service provider is getting value out of the agreement as well.

For the customer, it is vital to choose a service provider with extensive industry experience and expertise to deliver the services required at an acceptable cost, and one with a solid reputation for excellence. This requires investigation, reference checking and all of the usual procedures that should be involved whenever engaging with a new service provider. When it comes to negotiating the contract a clause should also be incorporated to cater for services that can be scaled up or down should the scope of the work and hours fall outside of certain accepted parameters. If market conditions are not monitored organisations can end up paying more for outsourced services than they would have maintaining them in-house.

While a fixed service fee approach has many benefits and can help to prevent outsourcing costs from spiralling out of control, it is important to make sure that the right service provider is engaged to deliver. It is also crucial to ensure that the outsourced service provider is a good ‘fit’ for your organisation without compromising on quality and service. Always check accreditations, partnerships and certifications and verify their authenticity to avoid being caught by a ‘fly-by-night’ service provider. The implications of getting it wrong can be catastrophic for any organisation, so as the old saying goes, better safe than sorry.