So, you’ve taken the plunge and settled on a software purchasing mechanism for your enterprise. What’s next?
You still need to decide how you will deploy it. Will you do it yourself, outsource it, or use a host? In this article, we’ll look at the pros and cons of each option.
In the first part of this series, “Changing software agreements could give CIOs more choices,” we examined the terms and conditions you should consider while outlining your software purchasing strategy.
Because we’ve always done it that way
Internal deployment is generally the first and only option that medium to large corporations consider. Because CIOs and MIS managers have large staffs to justify, their general conclusion—without exploration—is that the most cost-effective way to deploy a software license is to do so with their own staff and equipment.
Cost analyses done for well-built organizations with energized, fairly compensated, long-term employees will almost always show that internal deployment and support are the most cost-effective means of license deployment. It’s really a tribute to these organizations and their leaders that they’ve been able to consistently deliver a lower-cost, higher-quality solution using internal resources.
These organizations have a huge advantage in delivering services to their employees because they understand the business needs of the organization as well as the infrastructure architecture and support requirements. Developing this knowledge externally is much more expensive than leveraging the internal resources.
For IT organizations with considerable turnover or employee unrest caused by mergers, acquisitions, or constant internal power struggles, it’s difficult to create realistic license deployment schedules. In these cases, using a third party to manage the license distribution can provide an easy way for the CIO to consolidate license procurement and distribution functions without starting an internal turf war.
Because we’re in the <insert industry here> business, not the IT infrastructure business
Companies that consider outsourcing as a viable option generally concur that outside companies focused on supporting infrastructure can provide overall reductions in their infrastructure support costs.
In an outsourced arrangement, a third party creates a duplicate, unique, non-shared environment within which the companies’ applications are supported. Hard dollar costs for hardware, software, operations personnel, etc. are generally the same or even more than the internal cost.
CIOs assume that the total hard and soft dollar costs are minimized because they can eliminate staff positions, hardware and software leases, project management costs, and other ongoing support costs that inflate their bottom line. These outsourcing deals generally last a minimum of five years and a maximum of ten years in order for the third party to be able to recover their direct costs and to make a profit.
The agreement may also include or require that the third party hire the CIO’s internal operations and support staff for some period of time.
The advantage of this situation is that the IT function can be viewed as a “black box” that someone else has to keep running. This allows staffs to focus on adding business value as consultants to the business units without worrying about the nuts and bolts of how the system operates.
The disadvantages of this arrangement can be summarized in a single word: control. If the contract doesn’t anticipate customization or configuration issues, changing business issues, or rapid changes in technology, then the business is left with an inflexible system for which it has a multiyear contract to use.
Because shared systems drastically reduce my operational costs
Companies that consider having all or part of their applications hosted are relying on their hosting vendors to return some of the efficiencies gained by sharing resources between companies. This is the key difference between outsourcing and hosting companies.
Outsourcing companies create minidata centers for each of their customers, while hosting companies create shared resource farms that allow their customers to coexist physically but are represented logically and securely to their customers as unique entities.
By building systems that can scale rapidly but share resources efficiently, hosting companies can deliver services much more cost effectively than outsourcing companies.
Hosting companies also have the advantage of delivering a portion of a company’s services. For example, if you purchase licenses for an e-mail or customer relationship management (CRM) system and want just that portion of your IT services delivered externally, a hosting company familiar with the complex external authentication and authorization issues is in a better position to deliver these services than an outsourcing company that assumes all authentication and authorization services are local to their outsourced platform.
Many outsourcing companies recognize the negative stigma attached to their service delivery mechanism and go to market calling themselves hosting companies. You should be wary of any company claiming to be in the “applications hosting” business who has contracts of five years or more and duplicates a company’s entire environment externally in order to deliver the services “efficiently.”
You should also ask for specific details of a true hosting provider’s infrastructure and security architecture. Before using a hosting company to deliver your software, make sure that their infrastructure actually scales easily and quickly. You also need to be assured that the security mechanism used by the provider ensures complete logical separation of data between companies on the shared platform.
Is that your final answer?
Only a full analysis of costs involved in internal, outsourced, or hosted license deployment will render an accurate assessment of your company’s correct choice. You owe it to your stockholders and employees to investigate all your software deployment options.
What has worked best for your enterprise? Did you make the right decision? Post a comment below or send us an e-mail.