The current slump in IT spending, or at least a significant part of it, is a result of the careless billing models IT companies have forced on their customers. Businesses often find themselves with huge IT bills, but without any real measure of how their IT spending is benefiting the company.
"Since the dotcom crash, the IT industry`s psyche has changed to such a degree that in many instances it now carries the image of a cheap used car dealer," says Richard Firth, CEO of MIP Holdings. "The faith and trust customers once had in their IT partners, and in some cases in their internal IT departments have vanished, replaced with suspicion and questions as to the value of IT to those organisations.
"It`s amazing to think about how long IT companies have been able to send large accounts to their customers without having to share their customers` business risks," Firth adds. He uses the building industry as an example: it has long been an industry with tight constraints in which building companies often share the risk of a project with their customers. If a project fails to reach set targets the builders share the loss with their customers, but if the project is a success they share in bigger profits along with their customers.
"In the building scenario, it pays all parties involved in a project to do their best to ensure the project succeeds because they all make more money that way," explains Firth. "This type of partnership is a rarity in the IT world."
The type of "shared-risk" projects Firth envisions are risk-based outsourcing agreements in which the success and growth of the customer`s business will result in greater revenue for the IT supplier when the customer succeeds, and less revenue if the customer fails. This is not a sales-based outsourcing model, but an annuity-based model in which the IT supplier`s business is tied to its customer`s success.
As an example, Firth refers to MIP`s healthcare software services. "Our income in these services is not based on simply selling a product to a customer at a fixed cost and then selling support at a fixed cost, but the fees we charge are based upon the service and quality we deliver.
"As the customer`s policyholder base grows through the superior management, lower costs and improved productivity our software enables, the more money we make. If the opposite happens and we cannot provide customers with solutions that will enhance their business, we earn less money. In other words, we ride on the back of our customers` success."
With this new billing model, the relative IT costs are calculated and the supplier is paid according to and within the IT cost structures. The better the outsourced systems perform, the more the supplier earns. If they don`t perform, the supplier feels the same pain as the customer.
Considering the expected growth of the outsourcing market, companies providing outsourcing services should consider the risk-based model of business to enhance their competitiveness.
According to IDC, worldwide spending on information systems outsourcing services reached $56 billion in 2000 and is expected to surpass $100 billion by 2005. The research company notes that although the US will continue to account for the bulk of this spending, companies around the world are increasingly turning to outsourcing to remain competitive in the global marketplace.
"IS outsourcing services outside the US have increased substantially as a result of the healthy growth of outsourcing in traditional markets and the increasing acceptance of outsourcing in formerly untapped areas," says Cynthia Doyle, programme manager of IDC`s IT and Offshore Outsourcing Strategies research.
"As companies worldwide deal with forces such as deregulation, privatisation, recession, globalisation, lack of skilled personnel, shortages of resources, and dynamic technological and economic changes, outsourcing will continue to be an attractive operational alternative and source of competitive advantage for them."
Additionally, IDC notes that US-based companies will dramatically increase their spending on offshore outsourcing services. The company indicates the amount will more than triple from under $5,5 billion in 2000 to over $17,6 billion in 2005. The researchers believe India is best positioned to capture a large part of the offshore outsourcing opportunity. However, it believes other regions also have the potential to develop as major sources of offshore outsourcing, including Mexico, the Caribbean, South Africa, Israel, Ireland and Eastern Europe.
"These figures highlight the potential for South African companies to attract international business if they can deliver the quality demanded by global organisations," notes Firth. "An effective shared-risk outsourcing agreement can be the deciding factor for international companies considering a South African supplier."
Using a shared-risk based outsourcing agreement will mean less risk for customers and a better guarantee that their IT infrastructures will provide the value the company requires, which will benefit the bottom line of both the customer and the outsourcer. The shared-risk model will change the provision of IT services billing methodology forever as IT providers can now be held accountable, Firth concludes.
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