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Marketing & Competing

Fortnightly Magazine - November 1 1996

The decision to buy, build, and/or sell information technology assets carries many pitfalls, especially for a regulated utility. After all, information systems developed by, and for, a utility may not only support its operations, but may also be marketed to others in a dynamic and emerging market.

Case #1 (em Unwanted Upgrades

A utility company signs a multiyear outsourcing arrangement for the operation, management, and further development of its customer information services (CIS) system.

A year into the deal, despite a contract containing what the utility thought were clearly stated monthly service costs, the vendor starts sending unanticipated, sizable invoices for further enhancement of the CIS system. Having shifted key expertise in management information systems (MIS) to the vendor, the utility now feels "captive" (em in a weak position to question the bills.

Most problems in outsourcing transactions arise from poorly defined terms. Even if the vendor has committed to contract terms during the bidding process, "surprises" will likely arise if the parties have not adequately defined the scope of the agreement, its level of service, and pricing arrangements.

Scope. Think of the "scope" of the outsourcing arrangement as a matter of requirements or needs. In Case #1, the general scope might be documented as "the operation, management, and further development of a comprehensive, multimedia CIS system designed to meet the existing and projected requirements of the company for the 10-year period ending December 31, 2005." The agreement should add a detailed description of specific tasks and benchmarks to be achieved, but any such list should be purely illustrative, not exhaustive. The contract should also require the vendor to perform appropriate due diligence so that it cannot later claim it did not understand the project or its scope.

Level of Service. Consider the services that your MIS department has provided historically. Then assess what services are expected by internal users and external customers.

The contract must specify the required service levels (e.g., response times for service requests) that the outsource vendor must provide. Not surprisingly, the higher the service level, the higher the price for that service. It is customary to impose penalties on the provider if service levels are not met, and fees

for optional higher levels should be negotiated beforehand.

Pricing Methods. Recognize first that the vendor will attempt to limit risk by charging a fee for various "extras" that go beyond the basic service level. However, one of the primary reasons to outsource is cost-predictability. Thus, do not draft outsourcing agreements as time-and-materials contracts. Rather, provide in advance for fixed (or variable) pricing for in-scope services, with separate pricing arrangements designated for services outside of the scope of the initial outsourcing. Variable pricing can be based on usage and efficacy; the utility should be wary of pricing based upon time expended by the vendor.

Case #2 (em Extricate and Reacquire

A utility enters a CIS outsourcing agreement that asks the vendor to take over and upgrade a legacy CIS system at a new data center funded by the utility. The utility envisions the upgraded CIS system as object-based, with

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