Ric Hughes, President and CEO, Systems Alliance (http://www.systemsalliance.com/), says:

The process of modeling financial options for IT service delivery is evolving as service delivery components become more fragmented, service provider options multiply, contract maturities decrease and enterprise IT organizations adapt to a service delivery “assembly” culture.

Before the economic meltdown of 2008 – 2009, the rate of change in enterprise IT service delivery models proceeded at a glacial pace. Most organizations operated with an internally focused set of service delivery capabilities (using internal resources, applications and infrastructure to meet the needs of the enterprise) or with a two-dimensional outsourcing model (the enterprise and a single broad-line outsourcer). For purposes of this discussion, we define service delivery models to include the entire portfolio of service delivery processes as opposed to the selective outsourcing of individual service delivery components.

What’s changed? Economics and significant advances in private and public cloud provisioning and management tools have dramatically altered the service delivery landscape, and have prompted the need for new financial modeling tools.

Cloud management tools are at about the maturity point that we saw three or four years ago with server virtualization tools and are improving quickly; this will support the service delivery assembly approach as customers continue to move to a multi-supplier model. Many of our clients are finding that developing a well-structured financial analysis of service delivery options now includes a perplexing set of options distributed across multiple service providers, many of whom will provide a nearly endless series of pricing options. The days of creating defined options for internal service delivery and a comparison to a single outsourcer are behind us and have been replaced with the kinds of multi-dimensional problems that made me hate Linear Programming and Managerial Economics in college.

CIOs and senior executives are discovering the “joys” of assembling multi-faceted service delivery models using a portfolio of suppliers (“productized” operational services, consulting services, managed services). Supplier identity, pricing and Ts&Cs change rapidly in the world of service delivery assembly, on average every 12-18 months as opposed to the old five to seven year model that was the norm in the days of two-dimensional outsourcing. Developing an ongoing understanding of your service delivery cost model requires a different approach.

To support our clients’ evolving requirements, Systems Alliance has adapted our financial analysis methodology for service delivery modeling to better fit multi-supplier environments. At its core, this means breaking down the service delivery model components into smaller chunks. By design, we shrink the timescale to 18 months and build assumptions around price escalation and reduction with the implicit understanding that the market will evolve to better pricing paradigms before one or more of the supplier contracts mature. This guides vendor contract negotiations around pricing protection, automatic increases and other terms that would typically have been escalated with the two-dimensional outsourcer model. Service providers no longer have the option of a break even revenue model in the first two years of a seven-year contract followed by five years of change orders and growing profits.

As the “single throat to choke” approach is replaced by an emerging portfolio of service delivery suppliers, supplier management becomes more important than ever. Getting to an understanding of how to model your options is key. We recommend the following as best practice steps on your journey to building accurate financial models for your IT service delivery options:

A. Start your modeling process with high-level descriptions of the service delivery process, plugging in supplier types rather than names
B. Thoroughly vet relationships between service delivery components and understand the beginning and end points of each service delivery component
C. Identify component dependencies and costs if a dependent series of services is impaired by a single supplier failure
D. Model different time scales to determine the optimal contract length for you rather than accepting the supplier’s starting offer on contract length
E. Isolate and prioritize high-value (high value to the business) service delivery components and begin your analysis with those.