Monitoring your IT Contract

By August 14, 2012Business, Buying Advice, Cloud

Some businesses apply a ‘set and forget’ attitude to IT, as outlined in this recent report on “IT outsourcing mega-deals” from The Age. We don’t operate in the IBM etc space, but that doesn’t make the lessons any less valuable. We generally recommend our clients review their IT Strategy approximately every 3 months. Our agreements are only ever for an initial 12 month term – and that’s just to ensure we can get from where they are to stably operating on our managed IT platform without bailing half way through and causing a whole bunch of complications, not least for them. However, we’ve heard of plenty of providers that lock clients in for 3 or more years on the back of a slick PowerPoint presentation, only to basically go to ground and do the minimal amount of work required not to get sacked. Of course, their contract isn’t renewed, but by then they’ve already laughed all the way to the bank with your money. “Churn and burn” they say. It’s not just unethical, it’s incredibly short-sighted business practice that will ultimately lead to these companies’ demise and some very unhappy customers.

Most of our work comes from clients who have been ‘burned’ by their previous IT provider, sometimes in the manner described above. Some of it comes from a natural growth and evolution in our clients’ businesses that demands a more sophisticated solution than the lone IT guy (or single employee), but most of the time, we have our incompetent competitors to thank for the referral!

In the interests of preventing this from happening to you, here are some tips for managing your IT contract, both up-front and ongoing:

  • Define roles, responsibilities and align these with risks. The company most able to reduce the risk should bear the responsibility for it.
  • Ensure the proposed service scope matches your expectations. Don’t assume anything. e.g. Some “proactive managed IT” providers don’t actually include any desktop support, others (like us) do. There’s a big cost of provision difference between the two.
  • Long contracts can work, but generally things change too much such that they’re worth renegotiating at least yearly. Either stick to yearly contracts with extensions, or insert explicit renegotiations at that point. It sets the expectations that your provider needs to work for their money for a start!
  • Be clear about hardware – who buys it and under what approvals and markups. Many IT providers make more money from selling you over-inflated hardware than they do from providing you service. I think this element of the Financial Services industry is immoral (incidentally, there are new disclosure rules about that now – I wonder why!)
  • Be clear about supplier choices / “partners” the provider works with – sometimes there’s a good reason (special support relationships, technical excellence), sometimes the reason is just old-fashioned payola (freebees, cashbacks, commissions etc). True supplier independence isn’t necessarily in your interest either – search and transaction costs can be high in this case, but make sure whatever the situation is, it is well explained and in your interests
  • Be clear about process expectations – if you expect your outside provider to follow the same purchase approval procedures as an internal employee, you should be prepared to pay (a lot!) for their time in so doing. This can get prohibitively expensive fast, which is why many providers instead opt for the direct supply price-gouging. We operate a different model whereby we have an equipment fund that we are responsible for and report back to you on, like a mini bank account. That way, you still get financial controls, but the transaction costs (in economic terms, not bank fees!) are minimal. For instance, that lets us give our managed IT clients direct access to our supplier discounts (which can be substantial due to our purchasing power), whereas we’d otherwise have to charge a markup to cover all sorts of risks.
  • Keep things flexible – if your business circumstances change, for better or worse, you want to be able to adjust your contract – both price and service – to suit. This should be a normal everyday thing, not an argument.
  • Be clear about who is responsible for what amongst your managed IT provider and your other IT vendors – hardware, software, support. You may not want your Managed IT people in the loop if, for instance, you have a complex ERP system with dedicated vendor support. However, there will come a time where they almost certainly need to know about it, or even step in and start doing the job of support or integration that someone else is paid to do, even though they shouldn’t have to. Ideally your provider should be capable of all this, even if your day-to-day scope excludes it. Day-to-day issues are more likely to lie around hardware fault diagnosis and repair. We often see companies spend significantly more time than it’s worth chasing down warranties for cheap replaceable parts. In one case, an employee was without a computer for two weeks whilst the company, service provider & hardware vendor played blame games about who was responsible for fixing a blown power supply. This ended up costing over $500 in direct costs, plus two weeks of unproductivity, for a $70 part. Warranties have their place, but they have search, transaction & competence costs too. i.e. You can’t just out-source a hardware failure on your server to Dell – the most critical part is your data and business continuity, not the few hundred dollars of parts they’ll get back up and running for you in 4-24 hours (and even that’s a maybe!)

Above all, have a conversation. This is your business. These are not technical questions so much as ones of business structure, responsibilities and incentives. If you stop thinking of it as a technical problem you don’t want to know about, chances are you’ll ask all the right questions!