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Data Center Outsourcing Criteria Guide

September 18, 2008

Making the decision to outsource data center processes does not have to be a difficult task, provided that IT uses a formal procedure for separating core processes from commoditized ones. Use the results from this procedure to make the appropriate vendor selection.

Executive Summary

Data center outsourcing is a mature offering that is gaining wider appeal as enterprises attempt to reduce costs, minimize IT complexity, and improve disaster readiness. If the enterprise’s data center is capable and efficient at providing processes and services that are core to the business, then outsourcing is usually not a consideration.
However, commodity and/or non-essential processes can often be outsourced safely and in a cost- effective manner. This research note provides selection advice for:
» Establishing performance expectations for data center process outsourcing. » Determining which data center processes can or should be outsourced.
» Choosing an outsourcing vendor or service provider.
Making the decision to outsource data center processes does not have to be a difficult task, provided that IT uses a formal procedure for separating core processes from commoditized ones. Use the results from this procedure to then make the appropriate vendor selection.

Strategy Point

Data center outsourcing is an option that has been gaining wider appeal as enterprises attempt to reduce costs, minimize IT complexity, and improve disaster readiness. When the enterprise’s data center is delivering efficient and effective processes or services that are core to the business, then outsourcing is usually not under consideration.
Commodity-status processes, on the other hand, are prime candidates for outsourcing. The following processes are typical commodity functions found in data centers that can be safely outsourced to a vendor or service provider: systems, tape, and print operations; technical support for all systems; production control; backup and recovery; data security; storage provisioning and management; and asset management.

Key Considerations

1. Determine IT’s ability to meet business requirements. While data center processes aren’t necessarily low in value, IT’s inability to deliver these services in a capable manner can lower their value significantly, particularly if the enterprise relies heavily on them. The ability to fulfill data center processes such as those listed earlier can be determined through using a simple 2×2 decision matrix.

2. Determine, process by process, what is considered a commodity. The next step in the outsourcing decision initiative is to determine what can be retained or outsourced using a basic flowchart model (see Figure 2). Any decision to outsource data center processes must begin with a formalized method for deciding which processes should be retained or outsourced. Simple processes transfer well to a new outsourced vendor and are likely to provoke competitive bids for the business. Moving forward, focus all outsourcing efforts and contract negotiations on commoditized IT processes.
» “Core” processes directly deliver strategic and competitive advantage (e.g. CRM, business intelligence, etc.). Note: smaller enterprises may outsource these processes, but they are the exception to the rule.
» “Critical” processes are those functions required to do business (e.g. storage, LAN, e-mail, etc.).

3. Prepare requirements documentation. Once the fate of each process has been decided, record which processes shall be outsourced and which shall be maintained internally. Be sure to include the capabilities required to continue delivery of processes via an outsourcer: service scope, Key Performance Indicators (KPIs), Service Level Agreements (SLAs), governance, and transition processes. This is the composite document that the business will present to outsourcers in order to determine vendor viability. It will also be used to communicate important information about change, planning, and next steps for IT workers, business units, senior management, shareholders, and other stakeholders.

Recommendations

1. Compare business objectives against success criteria. Building a business case to outsource IT infrastructure based on lowered costs for technology assumes that economies of scale will provide benefits. But technology costs comprise only a small portion of the total value in an outsourcing engagement and will provide limited cost reductions at best. Before reaching a decision to pursue data center outsourcing further, evaluate the business objectives and criteria for success against the enterprise’s current situation (see below).

Criteria for Success
» Because the error threshold for outsourcing pricing can be as high as 25% to 50%, successful outsourcing engagements must target savings of at least 15% to 20%.
» Avoid outsourcing contracts that cannot deliver a minimum savings of 10% in headcount as well as technology costs.

Increase Service Availability
» Mid-sized businesses with a need to provide 24×7 data center services beyond current staff capacity can find value in outsourcing.
» Outsourcing is also used to meet mid-sized business Disaster Recovery Planning (DRP) requirements. While this does not provide direct cost savings, businesses can forego the cost of going it alone by transferring DRP management and infrastructure requirements.
» Target a minimum savings of 25% from deferring additional headcount in-house.

Gain Access to Scarce Skills or Resources

Convert Fixed IT Costs into Variable Costs
» Outsourcing may provide value in situations where additional or new
skills or expertise are required beyond those available in-house.
» Mid-sized businesses confronted with variable or seasonal demands for staffing should leverage outsourcing to avoid the costs of permanent staffing for peak periods.

Convert Fixed IT Costs into Variable Costs
» Businesses in financial difficulty will seek to avoid large capital expenditures in favor of a lowered variable cost linked to actual infrastructure usage.
» Strictly a cash conservation tactic that typically provides for a cash- strapped business’ continued operation.
» Quantify and track savings against expected in-house costs throughout the engagement.
» Be prepared to adjust the level of engagement quickly as the business conditions change.

2. Begin one year ahead of the outsource date. Start negotiation efforts with outsourcers at least 12 months ahead of time to prevent governance issues such as poor outsourcer processes, skills, quality, or value. In outsourcing arrangements, enterprises are often at the mercy of the service provider and should expect significant short-term cost increases as well as the loss of any negotiating leverage in the process.

3. Assess outsourcer viability and security. Follow the banking industry’s best practice guidelines. A consortium of top US financial services firms – known collectively as the Banking Industry Technology Secretariat (BITS) – released a set of guidelines for evaluating the security risks of outsourced IT. The ISO 17799-based IT Service Provider Expectations Matrix provides a single set of rules for evaluating outsourcers. Regardless of industry, all IT shops should follow the BITS matrix – the banking industry is a high liability trade that is very stringent about to whom they outsource. The questionnaire-style matrix focuses on the following outsourcer security control areas:
» Security policy.
» Organizational security.
» Asset classification and control.
» Personnel security.
» Physical and environmental security.
» Communication and operations management.
» Access control.
» System development and maintenance.
» Business continuity management.
» Compliance with legal and regulatory requirements.
4. Centralize information and vendor management. While outsourcing IT processes to multiple vendors can increase complexity, it can also deliver best-of-breed options and increased negotiating power. If multiple vendors are used, it is important that all information is centrally collected, controlled, and monitored within the enterprise IT organization. A single point of contact for all internal technology support issues and all outsourcer communications allows the enterprise to target recurring technical issues, improve operational efficiencies, and support decision- making. A central management strategy can monitor vendor performance and ensure that different outsourcers are meeting service levels, availability, and other obligations.

5. Match the outsourcer to the enterprise. Vendor size and suitability are key components of any outsourcing arrangement. Most vendors will not consider an agreement below $1 million. In fact, most data center outsourcing arrangements will provide limited cost reductions at best, especially
for outsourcing engagements valued under $5 million. Also, focus is required to ensure a balance is struck between the best practices of the vendor (outsource expert) and the enterprise, which still has established processes of its own.

6. Approach vendors with standardized Request for Information (RFI) and Request for Proposal (RFP) documents. Use the requirements documentation compiled earlier to build out standard RFIs and RFPs. Develop a standardized contract to optimize efficiencies or synergies. This includes service scope, pricing, KPIs, SLAs, governance, and transition processes. When ready, the business can then approach major outsourcers.

Major Outsourcers

ACS,CGI,CSC,EDS, Northrop Grumman,HP, Perot Systems, IBM Global Services, SunGard Computer Services, Unisys, VeriCenter, Verizon Business

7. Compare all costs for the engagement. Detail all in-house and anticipated outsourced costs through five years. Seek out any details that will erode expected savings in order to reduce the 25% to 50% error threshold within the outsourcing engagement. Continually track savings against expected in-house costs throughout the engagement.

Bottom Line

Making the decision to outsource data center processes does not have to be a difficult task, provided that IT uses a formal procedure for separating core processes from commoditized ones. Use the results from this procedure to then make the appropriate vendor selection.

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One Comment leave one →
  1. September 18, 2008 4:59 pm

    Hi. I am a long time reader. I wanted to say that I like your blog and the layout.

    Peter Quinn

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