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IT Services in 2009 – A Time to Re-evaluate & Re-Negotiate!

 

 

Current events may present some compelling opportunities for your IT organization. A down economy, excess capacity, the Satyam crisis, etc. are just some of the reasons your organization needs to re-assess its services procurement strategy and its services contracts.

 

Immediate Economic Opportunitymu

 

We believe there may be significant opportunities for your firm to negotiate more favorable deals with systems integrators, outsourcers and management consultants. Many of these firms have lost key business with major clients, especially those with significant exposure to Wall Street banks. These service firms have excess capacity and will be more competitive than ever to do deals.

 

How do we know this is a good time to negotiate great deals? Service firms live or die by utilization – the rate with which they can keep their expensive personnel chargeable. There are significant signs which point to systemic weakness in utilization in service firms. Specifically, we hear of several service firms:

-          losing business due to general economic pressures

-          deferring new hire start dates

-          seeing pronounced drop off of new business in specific verticals (e.g., automotive and financial services)

-          experiencing a marked reduction in voluntary job attrition and a marked increase in involuntary attrition

 

To take advantage of this market opportunity, you need access to current service market knowledge, solid negotiating expertise and skill in negotiating service contracts and the service level agreements that accompany many of these deals. Don’t expect these savings to be had easily. Service providers, like technology firms, remember the lessons of the Tech Bubble collapse and are a more hardened lot. Nonetheless, their firms will need to deal to get work and you owe it to your firm and your shareholders to get a solid deal.

Opportunity to Re-Negotiate Existing Contracts

 

Even if you are not looking to cut new contracts, we believe it would be imprudent to blindly renew pre-existing contracts. Whether your firm and its business have changed little over the last few years, your service provider may have been acquired, experienced material growth/attrition, benefited from changing foreign exchange rates, etc.

Because businesses are fluid and dynamic entities, the relationships between your firm and an outsourcer/integrator may need to change as well. Here are just some of the situations that can affect your relationship and the contracts you have with service providers.

-          A number of service firms have been recently acquired (e.g., EDS and HP) and your firm may be experiencing service level falloffs while these companies sort out their new post-merger life together. Are your customers or users suffering because of someone else’s inorganic growth?

-          If your service provider delivers its work from a different country are they benefiting from a foreign currency exchange rate that has changed lately? Should your firm share in some of these savings?

-          Is the level of attrition within your service provider growing? Is this impacting the quality of deliverables you receive from them?

 

 

If you haven’t performed an in-depth review of your IT service contracts in the last 18-24 months, you may be leaving money on the table or allowing sub-optimal service delivery to continue. Can your firm afford higher than necessary rates/charges? Can it afford sub-standard service or deliverables?

 

 

The Dangerous State of Service Firms Today

The recent events at Satyam underscore the need to perform heightened due diligence of your service providers. Even if your firm is satisfied with the level of service and the service costs of your integrator or outsourcer, what will you do if that service provider:

-          experiences significant layoffs

-          has a material contraction in its business

-          can no longer afford to service your contract

-          fails as an on-going entity

-          undergoes a material change of ownership

-          has much of its management team replaced

In recent months, we have seen some of these events play out. Worse, we believe at least three major service firms are in significant financial jeopardy and may fail soon. You owe it to your firm to perform an in-depth assessment of your key IT service providers. You also need to have detailed contingency plans in place in case one or more providers cease to provide the levels of service your firm needs and demands.

Going Forward

 

 

We recommend our clients:

-          re-assess the business conditions of their key IT service suppliers

-          confirm the long-term viability of their IT service suppliers

-          confirm each suppliers’ performance to contracts and service level agreements

-          craft alternatives to current suppliers either as a backup plan or as a very necessary business requirement

 

 

We would welcome the opportunity to discuss these issues, the current services environment and potential strategies going forward with you. Please give us a call and we would be glad to speak with you at your convenience.

 

We want all of our clients to emerge from the current economic situation stronger and more competitive. Incorrect service arrangements can become quite expensive and disruptive. Let us help guide you during these interesting times and make the very best services decisions possible.  

 

Please call (1-630-8779-0671) or email (contact@vitalanalysis.com)  to schedule a briefing today.

You Can Read Code - But Can You Read a Software Vendor?

Recently, Brian Sommer of Vital Analysis was interviewed for a brief article on software contract negotiations. The article was for the AirTran in-flight magazine Go. You can peruse the online version of the magazine here. The article is on page 59.

Here's what Brian originally pitched to the reporter:

It's critical for your readers to fight for these changes before they sign the contract. Once signed, negotiating leverage goes to the vendor or goes away altogether.

 

Here are some of the clauses I like to fight for:

 

material change of control - Few software companies or their products are the same after they've been sold to another firm. Sure, you can (and should) ask for software source code escrow but you need to carefully word the deal so that you get license, maintenance and implementation monies returned/reimbursed if the vendor is sold (or sells the software product line) to another firm during the first year or so of licensing the product. Be sure your material change of control covers asset sales, acquisition, divestiture, loss of founder and insolvency.

 

entitlement to any and all 'similar' products - Too frequently, software vendors will use the maintenance monies you've dutifully paid them year after year to build an all-new product line. The problem comes up when they want you to pay a new licensing fee to get access to the new product that you helped fund. This one's a no-brainer - you paid for it and you should get it.

 

discontinuance of application product lines - Vendors will cease to support old product lines. Make sure you know what this vendor's policy for sunseting old products is and make sure your upgrade capabilities can afford or work as fast. 

 

true enterprise license - No one can accurately predict what will happen with their user count, hardware configuration, technology innovations, etc. over the next few years. However, many firms own a piece of application software for ten years. If you agree to a CPU pricing deal, what happens if you want to use virtualization technology or a new multi-CPU server? Make sure the license does not tie you to an onerous cost structure or a pricing model that becomes obsolete in a couple of years

 

lock in price escalation for maintenance and service rates - Signing a software license agreement that ties annual maintenance payments to an unknown cost is unwise. Vendors typically tie maintenance to a fixed percent of the "then current list price of the application software". If a vendor raises their list price 10% annually but your business didn't grow, are you getting value for the extra money you're being charged? No. Likewise, if a vendor's prior price escalations have frequently exceeded the CPI (consumer price index), what does that say about their operating (in)efficiencies or greed? CPI should be used as the escalator for most deals.

Brian has negotiated a number of deals lately for clients including recent negotiation for a large software suite for one client and a manufacturing plant acquisition for another. He has also been on the road a lot lately (e.g., Korea) conducting negotiations training for major corporations.  

 Looking to make or re-negotiate a deal? Drop Brian a line at contact@vitalanalysis.com . 

Services Benchmark Opportunity

Here's an opportunity I'll pass along to Services Safari readers. I've known Dave Hofferberth for a number of years now. He was the Professional Services analyst for Aberdeen for quite sometime. His firm, SPI Research, tracks professional services firms and the vendors who support them.

Dave and Jeanne Ulrich are working on a benchmarking study and could use a few more service firms to join their effort. Respondents get a free report. Here's their teaser below:

_________________

Did you know?

·         Average reported PS backlog has dropped from 48.5% of quarterly revenue forecast to 39.4% this year

·         Average PS annual revenue per consultant has dropped from $214K last year to $186K this year

If you don’t complete our PS Maturity survey by next Monday, December 1^st you won’t know the answers to these and 175 other Key PS Performance questions so you will be left in the dark to navigate the turbulent times ahead.

This is your final reminder to complete the PS Maturity Model benchmark survey.  Here is the link:

http://www.spiresearch.com/downloads/ServPerfPillQuest.xls.

To date, over 140 PS organizations have completed the survey which means our upcoming PS Maturity Benchmark 2009 which will be published in January will be BIGGER and BETTER than last year.

Despite your procrastination, we are hoping to reach 175 completed surveys by December 1^st so we will reward you with a FREE COPY OF THE 2009 BENCHMARK (worth $495) just for taking the time to complete the survey.

So don’t delay – this is the easiest way to make $495 you will receive today.

Happy Thanksgiving and get your survey in!

Jeanne Urich

Managing Director

www.spiresearch.com

Phone:  650 342-4690

Mobile:  650 703-6593

New Blog on ZDNet

Spreading the Word - Through Another Channel

Several of the Enterprise Irregulars blog on ZDNet (e.g., Dennis Howlett and Michael Krigsman to name a few). Their experiences finally moved me to take the plunge, too. You can find my new blog, Software and Services Safari here. 

All of my other blogs will continue to get updated but please add : http://blogs.zdnet.com/sommer/ to your RSS feeds and blog roll.

Thanks

Whittman Hart Sale

                 End of an Era? End of the WhittmanHart Story?

Today, Rolta TUSC acquired WhittmanHart Consulting. The deal effectively splits Whittman into two with WhittmanHart Consulting (WHC) being sold and WhittmanHart Interactive remaining as a surviving practice. While this sale does not close out the WhittmanHart story, it does leave the firm as a shadow of its former self. At its peak, the company was one of the largest systems integrators in the Midwest. The firm experienced explosive growth during the dot.com boom and contracted just as quickly during the years after the bust. The company, at times known as MarchFirst, has been rebuilding in recent years.

WHC has skills in the BI space, particularly with Oracle's Hyperion products. The deal should be accretive to TUSC give the potential synergies between the WHC Midwest operations and those of TUSC's in India and elsewhere. For information, click on WHC. 

KPMG Lawsuit

                       Cast Art Industries, LLP v. KPMG, LLP

For those of you who watch such things, I caught this email last week announcing that a judge had found sufficient evidence for a jury trial in a case involving KPMG. The suit alleges that the auditors failed to detect a fraud worth approximately $50 million at Papel Giftware, a firm bought by the plaintiffs, Cast Art Industries.

Fraud detection, something that audits often detect, isn't the key role of an auditor. This point may come as a surprise to many lay people but that doesn't stop litigators to try to convince jurors otherwise. When fraudulent activity goes to the very top officers of a firm and is well hidden, auditors may have a tough time finding it.

If you're looking for something more intense to read, get the latest issue of Portfolio and see the story on the Carvel estate. Talk about a page turner: allegations of murder, fraud, adulterous relationships, etc. Now that's a story worthy of print.

More on Rankings

               Phil Expands the Conversation Re: Outsourcing Rankings

Phil Fersht of AMR Research covers the outsourcing space extensively and has a blog, Horses for Sources, dedicated to same. He's pulling together a number of perspectives regarding the recent hubbub re: outsourcing rankings. He has already gotten Deborah Kops to weigh in and I've forwarded along to him a post I did last week on the same subject. I'd like to thank those who took the time to comment on my posting.

A "List" of Issues

            Some "Rank" Behavior Regarding Outsourcing Listings

Steve Hamm penned a blog piece and an article for BusinessWeek (see: "Outsourcing's Dubious Kingmakers", www.businessweek.com, July 14 & 21, 2008) re: Brown & Wilson's annual Black Book of Outsourcing. The article questioned the methodology used by the firm in creating its annual listing of outsourcers. The article also questioned the movement in rankings and the location of the company's office.

I also saw Ed Nair's editor's note in this month's Global Services magazine (see: "The Outsourcing Lists", July 2008, www.globalservicesmedia.com). He took offense to a document that purportedly touts the Black Book list and disparaged others. Since I cannot find this document, I can't comment on it but I was certainly intrigued to its alleged comments.

That a list could generate so much passion and print was interesting to me as I generally can't get many people to care that much about the general ranking of two outsourcers. People seem much more interested in People magazine's Sexiest Man choice than a list of outsourcers.

Today, Wachovia Capital LLC hosted a conference call with Scott Wilson and Doug Brown of Brown & Wilson. Mr. Brown and Mr. Wilson stepped through a litany of Facts and Fictions re: their study and its methodology. Just based on this, it would appear that many of stories attributed to their study are not true.

On that conference call, we learned that:

• vendors are evaluated by customers across 26 factors, each receiving a 1-10 score for a maximum score of 260 points
• each vendor is ranked based on the mean score across all submitted ballots
• customer ballots are carefully screened to ensure that only the customer, and no one else, completed the ballot
• at least ten ballots per company are needed for the company to be included in the rankings
• outsourcers who try to cajole more clients to vote statistically hurt their rankings on average

What appears to be the biggest point of confusion in the market is that there are now 4200 outsourcing vendors being evaluated and the differences in scores between one vendor and the next in the top 50 list could be a mere few thousandths of a point. For example, look at the difference in scores in the example provided by Brown & Wilson for the Wachovia call:

   

When the differences are a mere few thousandths of a point, the differences are not statistically significant. What we should be seeing are the standard deviations for these scores as potential users of this data would see that meaningful differences may not exist between large groups of outsourcers evaluated. In other words, the numerical differences between two outsourcers with similar scores may not be a solid basis for including or excluding either from a selection short-list.

Moreover, when the top 50 vendors in a pool of 4200 vendors are selected, you can bet that the scores will be close for these. In fact, the top 50 represent just over the top 1% of outsourcers evaluated. These scores are like trying to delineate the differences between your salutatorian and valedictorian. They're both great.

As for the Brown & Wilson report, I am satisfied that they have adequately calculated the results and protected the integrity of the inputs. People who rely on this data need to recognize that:

• a statistical score is no substitute for doing your own due diligence re: outsourcers
• narrow score differences are not reasons for including or excluding outsourcers from consideration
• with outsourcers and mutual funds, past performance is no guarantee of future results

I do not have, nor have seen, the document that supposedly came from CIO magazine that alleged some other points.

If you'd like to see the Top 50 list, click on this Wall Street Journal link.

Be a Better Speaker (3)

Delivering a Great Keynote Presentation

Part 3 – The Story

A great story has a beginning, middle and an end.  It should also have moments that touch us deeply.  Some humor along the way often helps the story as does the personal touch.  How many elements like this can be incorporated into your presentation?

If you really want to nail your next keynote presentation then invite some colleagues in to hear you deliver it for them.  Let them tell you where the highlights and the flat spots are.  Let them tell you how you could soup up some of your slides to increase their impact on the audience.  What I’m suggesting is that you seek second party review of your keynote presentation before you give it.

I believe that each of us are capable of coming up with somewhere between 65-95% of a great presentation on our own.  However, a few minutes spent with others can take a passable presentation and make it outstanding if you are willing to seek the counsel of peers.

Sometimes the best movies or books that we see or read contain a plot twist.  It’s that a-ha moment that make us stop and consider why we were so sure the plot was moving in a different direction. A good keynote presentation should have some moments where the speaker confronts our biases, prejudices, or conventional wisdom and makes us see things in a different light altogether.

When you challenge the status quo, you may have an immediate impact on the attendees.  You are creating cognitive dissonance – that unsettling feeling we get when we realize we may have been wrong. In public speaking, you must engage the minds and hearts of the audience if you want to have an impact on them.

Great keynoters utilize a mix of proof points as they speak.  People in an audience distrust a single source of insight.  Just because you’ve done a research study does not mean that the conclusions are necessarily true.  It’s fine to share relevant facts with an audience but do not assume these will change the audience’s perspectives in and of themselves.  You must back up any research with anecdotal conversations with business executives or others who are facing the issue you’re discussing.  You should illustrate how one company has confronted this issue via a case study.  Audiences will not believe your conclusions until you paint a vivid, complete and colorful picture around the subject matter.

Try these techniques to make your story telling better:

-          Substitute a picture for each slide within the body of the deck. Find relevant pictures, graphics, etc. to use instead of text. Pictures are worth thousands of words and people remember them. Audiences are terrible at memorizing your text.

-          Incorporate music or a video clip into your presentation. Multi-media isn’t just for the artsy types. You can do it, too, especially since I’ve seen school age children do it all the time.

-          Ask people in the audience to offer up some answers to a question you pose. Put the question on a slide or ask it from the podium/stage.

-          Poll the audience once or twice. A funny thing happens when you ask an audience for their opinion. Funnier still, see how they react when you bust their bubble as to conventional wisdom.

-          Walk out into the audience. Walking around is visually more entertaining to an audience. It’s a rare person who can stand motionless behind a podium for an hour and still keep the audience’s attention.

The Consultant's Carbon Footprint

Manufacturers Aren't the Only Firms Affected By Carbon Emission Laws

                                Is Your Firm a Carbon Junkie? (Are You?)

Suppose there was a 12-step program for consultancies.  This program would help consulting firms wean themselves off of decades of bad social and environmental policy.

In my own case, if I attended one of these meetings, it might have gone something like this:

Brian: “Hi, I’m Brian. I am a consultant and for 12 years I was a carbon pig. It’s been almost 4 weeks since I last boarded a jet.”

Group: “Hi Brian"

Moderator: “Welcome Brian.  Please, tell us why you feel this way."

Brian:

“Well, for most of my early career, I worked really close to my home, shared a commute with my brother and drove a fuel efficient car.  For one client, I stayed at the family ranch to minimize my commute.  In fact, I never flew to a client for the first seven years of my career except for one interesting week in Jackson, Mississippi. Then, the management of our firm decided that my talents would be better utilized at intergalactic world headquarters.  Once I got sent to Chicago, I got hooked on flying."

Moderator: “Tell us about your addiction”

 

Brian: “It just came on so sudden.  I went from making one or two flights a year to seven or eight a week.  Before I realized it, I was spending over $250,000 per year, every year, just on airline tickets alone.  I kept this pace up for 12 straight years and in my last year alone I bagged 48 international roundtrips."

Moderator: “What made you realize this was wrong?"

Brian: “The travel was beginning to supplant my everyday life.  American Airlines special services agents were seeing more of me than my own family.  I realized that I had leisure clothes in my closet that I was never wearing because I was always flying to or from clients but spending no time at home.  When I saw that I was about to cross the 3,000,000 mile mark for American Airlines, I knew I needed to change.”

Moderator: “How did that go?”

Brian: “It was tough.  I didn't realize how difficult it would be to not go to Midway or O'Hare airport at least once a week. I had withdrawal issues. I even missed the smell of that sickly smelling de-icing fluid that seeps through the ground by Terminal 1 at O'Hare.  I missed the smell of burnt kerosene on the tarmac.  But most importantly, I miss those hot steaming towels they hand out in first class.

Yes, I know I had an addiction to flying.  I flew because I thought it was the right thing to do to advance my career and to serve clients.  And while I thought I was doing the right thing for me professionally and my family economically, I now see that I and many others like me wasted a whole lot of fossil fuel.”

Moderator: “This is good Brian.  You've moved past the stages of denial and acceptance.  What are you doing to make your consulting business today less of a carbon pig.”

Brian: “Well, for starters, I have embraced WebEx, DHL, FreeConferenceCall.com, email and Skype as my new higher powers.  With these tools alone, I have been able to eliminate a significant amount of my travel.  I'm proud to say that I'm now down to just one or two flights per month.”

Group: “Yeah”

Moderator: “That’s great Brian.  What else are you doing?”

Brian: “I've decided to work full-time from my home office.  Commuting simply wastes motor fuel and eats up a lot of valuable time.  An office, I have come to realize, seems to be more about prestige and ego - not around saving scarce natural resources.  As to flying, I almost never take trips of a purely promotional nature anymore.  I dovetail business development activities on the backs of other client related flights to minimize wasteful trips and the high SG&A costs they generate.”

Moderator: “That's great Brian but what else are you going to do?"

Brian: “Well I'm really worried about some of my friends.  I have a number of colleagues who are also consultants or bloggers who still aspire for the bad habits of yesteryear.  They still brag about free first-class upgrades, how brutal their six flights this week were, and how petty the airlines have become.  I just don't think my colleagues have developed a social conscience just yet.  They still can't decide the difference between “meetings” and “meetings that count”.  And until they do, I fear for their non-carbon-based soul. One of my colleagues has a carbon Jones really bad.  He's still flying to clients weekly as well as to numerous family events around the U.S. and Europe. We may need to stage an intervention for him.”

Consulting firms have had to scale back their travel and entertainment expenses in recent years because of a number of factors:

• closer scrutiny that clients put on them for their travel expenses
• outside investors in the these consultancies want less money spent on travel and entertainment and more money returned to them in the form of shareholder dividends
• rising travel costs
• pressure to make their businesses more family friendly

The current fuel and airline pricing environment will also drive more curtailments by consultancies. But, these changes are an economic reaction and not one based on social policy or an awareness of a new regulatory requirement: Accounting for one’s carbon footprint.

That will change and change quickly as businesses will soon be required to report their carbon consumption.

Consulting firms may be in for a shock when they realize how much carbon dioxide their firms produce via:

·         worker commuting activities to the office

·         commuting to client sites

·         pre-sales travel

·         company meetings

·         other air, rental car and personal automobile travel

Smart consultancies will get ahead of this issue to understand what their current consumption levels are and what options remain for them to rein in marginal activity that is contributing to their carbon footprint.

Reconciling new carbon reduction initiatives with newer personnel policies will be a tough balancing act for consulting firms.  In recent years, firms have changed their out-of-town work policies to permit employees more frequent trips home.  When these policies were crafted, fuel was cheap and carbon consumption was a non-issue for businesses.  Neither of those assumptions is still true today.

Consultancies would be wise to reevaluate their workforce satisfaction and workforce travel policies.  If a company must reduce its carbon footprint then can it afford to fly workers home every week?  Does this mean that firms will staff a significantly higher percentage of projects with local personnel?  How will clients react to the unavailability of critical subject matter experts because their presence on a project will have an adverse impact on carbon emissions?

Questions like the above will become fascinating fodder for the rank-and-file as well as the executive management of service firms.  Technology will go a long way to close some of the gaps; however, tough decisions will need to be made as to whose priorities will take precedence: clients, shareholders, environmentalists or the employees?  If I had to bet, the priority would fall in the order I just listed them.

Thoughts?