In the previous two Industry Insights in this series, I reviewed critical aspects of the risk-based billing model that makes cloud computing work in the South African context. Now I will look at look at how this risk-based billing model is changing the dynamics of IT.
Simpler security
Keeping the crown jewels in the castle, or the data inside the company and not on a large shared server at an outsourcing vendor's premises, ensures data security from all points of view.
Most importantly, the customer has some control over access and can monitor connections to the server, providing management with that extra feel-good security that they have not abandoned their confidential data to an unknown administrator in some far away location.
This is an important differentiator to the standard SaaS model.
IT vendors play nice
No one company can do it all, not even IBM, HP or Microsoft. The services model we are discussing may only present one face to the customer, but behind the scenes hardware, software and networking companies partner to deliver the full solution at the best price possible.
No one company can do it all, not even IBM, HP or Microsoft.
Richard Firth is CEO and chairman of MIP Holdings.
In the traditional outsourcing model, crashes and system downtime were a vendor's dream as they were paid by the hour to fix the problem. The bigger the crash, the more people had to be sent on-site to resolve it, and the bigger the bill at the end of the month. There was no real motivation in ensuring customers' IT systems were reliable and available at all times so the customer can be more profitable.
In the risk-based model, the vendor is liable if the system goes down. The vendor is now paid to write good software that serves the needs of the customer and performs to spec. The best and most reliable components will therefore be chosen to assist in keeping the vendor's staff away from customers - because all costs are for the vendor's account and there is also the question of penalties.
Consequently, the commitment to the customer from all partners is far greater than the traditional process of blaming everyone else. Service levels to the customer as well as the customer's customer will be vastly improved.
Changing roles
Instead of the IT director/manager spending time defending late delivery, expense over-run, functional mismatch or performance issue of a system to the board or executive, they will spend their time managing the vendor.
When a company outlays capital up-front for a system implementation, the IT manager has to defend or motivate new capital injections to the board in the event of over-runs. In the risk approach, the IT manager has to use their skills to manage a vendor of service until the required functionality is up and running, with limited financial inputs.
Remunerate CIOs according to KPIs
Customers can even look at changing their CIO-level pay structures. Their pay should be tied into the performance of the corporate IT infrastructure - according to the same KPIs on which the vendor's payment is based.
Software will now be used as a tool with specific deliverables - and IT management should have enough faith in their own decisions to risk some pay on the performance of the systems they design.
In other words, should management have the courage, all IT expenses can be linked to the performance of systems, as well as the growth of the company.
No billing surprises
The greatest benefit of risk-based services is the constant billing. Each customer knows what its IT will cost every month, whether the vendor spends the entire month working on the system to get it right, or even if it doesn't come onto the premises.
Both parties have a contract that says the IT bill will be a certain amount over the duration of the contract (normally three to five years). No surprises. Should the customer want extraordinary “additional services or development”, the cost can be amortised over this time, or even built into the original quote. This would have to be a totally different line of business that must be developed and run its course under a different services contract.
Best of all, there is no huge initial outlay to buy hardware, and there are no licence fees to pay. If the vendor wants to make more money, they had better make sure they provide the support the business needs to grow according to the KPIs determined at the start of the project.
* In the next Industry Insight, I will deepen the discussion on how this risk-based billing model is changing the dynamics of IT.
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