We have been running through pricing structure exercises in preparation of the issuance of an RFP for outsourcing IT operations. This has involved the breaking down of our various environments into components we believe we would want the suppliers to provide and coming up with metrics upon which to base the pricing of the component. One thing that is missing from the exercise is the examination of the underlying costs composing the metrics in order to have thorough understanding of the sub-components that drive the price of the higher level components. For example, a service such as email could be priced on a per account basis. This makes sense, but not all users and email accounts are created equal. The largest variable for email is storage. Is it better to create a base price for a single account and establish pricing for storage tiers? Or, do you establish tiered pricing for an email account? The model becomes much more complex once you get into a discussion about networking. Our consultants have been pushing making things simple and pricing the network based on the number of active ports. This is the old telecom model. The pricing model based on a metric of active ports breaks down once you start dissecting the network based on the types of ports you have, if it is at all possible to categories the ports. The model completely collapses if quality of service (QOS) is required, which is becoming increasing more common.
I have been pushing hard to require that the suppliers submit pricing justification or, at the very least, walk us through how they arrived at a particular price. This stance has met with significant resistance from our consultants. The counter stance has been getting into the suppliers pricing methodologies enters the realm of intellectual property and is too far “in their shorts.” A counter stance like this tells me I am on to something and that a supplier wants to hide the fat in their pricing. If a customer cannot meet a supplier on equal footing, the customer will inevitably be abused. There is no substitute for high quality due diligence.
Overall, I am unimpressed with the approach our consultants have been advocating. The approach is outdated by five to six years. It is wholly unimaginative, over simplified, and fraught with shortcomings that leave a potential customer open to be abused by a supplier. If companies the like of IBM, HP, CSC, Accenture, etc. cannot come up with a pricing model that leverages current technology, their customers are paying far too much for the service. I firmly believe that outsourcing can work as long as both parties enter the relationship with both eyes wide open and the value of decreased costs and operational efficiency is crystal clear.
