The value of your service provider’s expertise

Understanding the value of the services offered by internal and external suppliers is important in order to analyze and validate the choices available. That analysis can be as extensive or as simple as is necessary to communicate accurately the reason for the decision, but consistency is vital in the process.

The most difficult parts of these analyses deal with the soft costs of providing services. For example, what is the appropriate way to quantify the value of the expertise that is gained from service providers that offer similar services to multiple customers?

Clearly for the customer, that expertise often turns into reduced downtime, more rapid time-to-fix, and even better support, which leads to more effective use of the services. However, as I was asked recently by an IT manager at a major media company that was evaluating an application management system, “Where is the accounting model that allows me to account for the savings impact of something bad not occurring?”

In the struggle to come up with effective approaches to this widespread problem of quantifying savings, one user organization has focused on the natural currency for each area of savings or gain. For example, if some approach to providing the service showed a reduction in the number of hours to administer systems, the financial model would show “hours saved” instead of estimating the resulting dollar savings. This approach provides the information necessary for business decisions without developing the typical problems of overwhelming soft cost savings that jeopardizes the believability of the analysis.

During conversations this past week with Jim Howard, CEO of content management ASP CrownPeak Technologies, we discussed the value of specific expertise applied by service providers for more complex business applications. Howard mentioned that it isn’t just hard costs that are impacted by such expertise: “The software service model is not just putting price pressure on the installed market – how about reliability and usability pressure?”

He further commented on the key areas where service providers contribute directly to their customers’ needs: “Better pricing, lower implementation risk, better service and support, on-demand services [for expansion as needed], more stable business model, and quicker and lower cost way to develop and deliver software.” From his perspective, there are clear applications that are best delivered by a team of experts in the specific technology.

We then discussed whether CrownPeak follows this model in its business by outsourcing technology that is not core competency. It does outsource a number of areas, including customer application development, Web design, and others.

Howard also mentioned his perspective on offshoring: “Overseas outsourcing is getting all the press, when the big news in outsourcing is really right here – in the software services market. Outsourcing to a mature software service [provider] means high reliability, high levels of service and support, and a low upfront investment.  If the [provider] doesn’t perform, switch.  Better still, because software services …have powerful developer hooks, internal teams and third party integrators can work with the products, just like any installed product.  Software services deliver better cost-savings at lower risk.

Howard’s thoughts provided an interesting amplification of a recent “Los Angeles Times” column by Alex Pham entitled “Sending Jobs Overseas Isn’t Always Worth It, U.S. Companies Find.” In the article, Pham outlines the challenges that some companies have had using offshore development, and notes that more than 25% save nothing or actually spend more in the process.

So regardless of the type of service delivery possible for business services, understanding the hard and soft costs of the service and the impact of the various delivery options is vital to the overall process of choosing the most effective approach for an organization at a particular time in the business’s life.