Ten agreements that can save you hundreds of thousands of dollars

By Cheryl Watson

Have you ever considered that outsourcing—letting someone else take care of your data processing—is rather like a marriage or, at the very least, a partnership?

If marriage is on your mind, and if you want it to be a happy one, then to avoid unpleasant surprises you’ll want to put in place certain rules of disclosure and fair play. Obviously, there are many considerations, precautions, pitfalls and procedures, you need to be aware of to construct a good contract that enables a successful, ongoing relationship. For instance, service level agreements, baseline measurement, benchmarks, and reporting techniques are just a few of the topics you need to consider.

A good outsourcing business relationship can resemble a good marriage. But like any good marriage, or any contract for that matter, it works best when you spell things out in advance, when you minimize assumptions, and when you ensure ongoing open and continuous disclosure and communications.

For twenty-five years, I was involved in both the customer and vendor sides of these contracts. In one case, I was able to save a customer over $200,000 a month in charges over (expected) baseline by pointing out errors made during the original measurement; by proving that CPU increases and, therefore, CPU charges, were due to the outsourcer’s changes; and by resolving a conflict about service levels.

With a better outsourcing contract, you too can avoid all these pitfalls. Incorporating the following ten agreements into your outsourcing contract, will give you a much better chance of enjoying a successful marriage. They will help you build a successful, non-antagonistic, relationship.

1. Agree to baseline measurements – Almost all contracts begin with the vendor running “baseline” measurements of the existing system. After all, the vendor needs to understand the workload that exists today to determine the cost of running the contract.
2. Agree to service level objectives – The most important step before outsourcing is to determine current service level objectives (SLOs) and service level agreements (SLAs). Any outsourcing contract must define the service to be provided in terms of SLAs.
3. Agree to prepare a capacity plan –  Before committing to an outsourcing contract, prepare a capacity plan to show the anticipated increase in workload. This plan should include the expected growth of current applications as well as new applications.
4. Agree to an ongoing benchmark schedule and techniques – Benchmarks are a critical part of any outsourcing plan as hardware and software changes result in changes in the CPU seconds consumed.
5. Agree to a reporting plan – Here’s the place to save the marriage! It’s called “communication,” both verbal and written. This follows all of the same guidelines as found in marriage manuals. Communication should be open, honest, and continuous.
6. Agree to a meeting plan – Meetings help to eliminate misunderstandings. The more you talk, the less confusion and irritation you’ll experience.
7. Agree to a right of access to data – Most outsourced customers have either an audit department or technical staff to monitor vendor operations. This is normally acknowledged in the contract where the scope and responsibilities of the customer audit function is defined. Part of the scope of this audit function demands access to all datasets and raw data that relate to the customer account.
8. Agree to penalties – Penalties, such as reduction in charges, are imperative when talking about missed service levels. These should be documented in the contract along with the service levels. Some means of arbitration should also be defined that allow an outside arbitrator in cases that can’t be resolved.
9. Agree to currency – To be able to exploit new technologies to reduce CPU usage requires current hardware and software. In general, you should expect the outsourcer to keep the hardware within two generations of the current one, and to keep the hardware within two versions of the current one.
10. Agree on the basis of cost – Finally, and often the most important aspect of any agreement, is defining the basis of the cost of services. Naturally, as your volume of work increases, the outsourcer should get paid for the additional staff to support that work. But basing the cost on MIPS or MSUs can lead to conflict when the client wants the outsourcer to tune the system, but tuning it will reduce the outsourcer’s income.

Ensuring you incorporate these items into your agreements, before converting to a vendor-run installation, can save you hundreds of thousands of dollars by avoiding misunderstandings later in the contract.