Originally posted on on the e-Sourcing Forum [WayBackMachine] on February 27th, 2009

This two part post originally appeared last summer, but I thought would be good to review, as we just saw a Fortune 50 client auction, with 74% reduction in strategic IT services, last week – David Bush.

In our last post, I reminded you about “Strategic Service Management” and “The complexities of Strategic Service Management”, as well as about “Strategic Service Parts Management” and “Strategic Workforce Management” in my efforts to give you an answer to when do I source that?. Now that you know when you should be considering strategic services management and when it enters into your sourcing projects, let’s move on to the question that first comes to mind, how do I source that?.

The first thing you do is separate out the different types of services that are available into those you can do effectively in house and those you cannot. Then, for those services you can manage in-house, you figure out the average cost of offering those services, as well as the average resolution time. The reason for this is that even though you can do the work in house, if it’s not your core competency or core offering, if your provider can do it cheaper and better, you should outsource it.

Then you insure that your supplier not only breaks out it’s value added services from its core product offerings, but breaks down it’s services into as many discrete offerings and quotes each service offering separately. It’s true that you will get a better deal if you buy service packages, but you first need to figure out what the right service packages are for you and, more importantly, whether or not the supplier is capable of offering at least the services you absolutely need at the levels you need them.

For example, let’s say that you are a Technology Consulting and Services Firm that supports big clients with their technology needs, be it desktop needs or data center needs, including outsourced data center management. Let’s also say that some of your customers have mission critical services that need to be available 24/7 and that your technicians are certified on HAL and IQ but not on Moon, and that you only have enough HAL technicians on staff to confidently service the percentage of your customer base with platinum SLAs (Service Level Agreements) in house. This says that if you set up a customer’s new data center on HAL technology, you probably won’t need many services, but that you will take them if they are more economical than maintaining those services in house (which might require overtime or adding staff), that if you go with IQ, you will probably need some of their services and support, and that if you go with Moon, you will probably need a lot of their services. The following table breaks down what services you might need from each vendor:

Now that you know what services you can do in house, you need a cost. Let’s define the costs as average cost per year, based on your internal metrics. Now our table might look like:

Now that you know what you will need, and might need, from each supplier, you can ask for quotes on what you will need by individual service and service package, by each vendor, and do an informed total cost of ownership analysis on each bid and select the right product and service package for your business.

In this simplified example, you’d ask Moon to quote on each service individually and as a package; you’d ask IQ to quote on each service individually, a package for the two services you need, and a package for all three services; and you might ask HAL to quote on each service individually, a package for the service call and 4 hour part replacement, and a package for everything. After this, you would have something along the lines of the following:

You’d then compare these total costs to hybrid costs where you kept some services in house, which would give you:

And finally combine these costs with the hardware costs, which might be 240K for Moon, 270K for IQ, and 250K for HAL to get a total acquisition cost:

And conclude that, if all things were equal, the best deal would be to single source all hardware and services from IQ. However, we are talking hardware, where the total cost of operation usually exceeds the cost of acquisition when you add up all the energy requirements to run a server for a year AND keep it cool, so you’d also have to add an adjustment cost for expected energy consumption to find the very best deal, but you get the point.

I should also note that, as you saw from even this simple example, this is calculation heavy, error-prone if done by hand, and not spreadsheet friendly. That’s why you’d use strategic sourcing decision optimization software, such as Iasta’s Smart Optimization software, to do this analysis, as you could define, for each supplier, which services you’d need fro that supplier if the supplier was selected (because you can’t do them in house), and which services could be done in house. You can also define the cost of each service individually and then define discounts for different packages offered by the vendor. And building in cost adjustments for the differences in energy consumption is a snap.