Five Questions for Your MSP

And other tips for negotiating a contract.

Managed service providers sell IT-enabled services, which large businesses are increasingly buying piecemeal rather than charging their own IT organizations to acquire, install and run departmental applications in-house. In many cases, individual lines of business or functions such as marketing or human resources departments are contracting and paying for the services, bypassing internal IT organizations in the process.

But experts say the most successful arrangements with MSPs are those designed and negotiated when business and IT managers work together. "This is because most services are not provided in a vacuum. Data from an MSP still must be fed to the customer and vice versa. IT is still involved," says Mike Slavin, a partner at TPI Inc., an IT sourcing consultancy in The Woodlands, Texas.

Here are five questions you should ask to help your business users effectively negotiate the best MSP contracts -- and keep IT in the loop.

1 Who owns the license?

The MSP almost always owns the license to software used to provide a service. In fact, the MSP typically owns virtually all hardware, software, support and maintenance involved in delivering services such as sales contact management or benefits administration, according to Slavin.

"An MSP's value proposition is an end business result," as opposed to delivering services using specific tools, he says. And that's just as well, he adds, since buyers of MSP services -- typically business managers rather than IT managers -- don't care about the "IT plumbing," as long as they are regularly getting the reports, sales leads or other services for which they've contracted.

2 Who owns the process?

The customer owns the process, and the MSP executes it. For example, Whirlpool Corp. recently signed a 10-year contract with Cincinnati-based Convergys Corp. to provide Web-based human resources services to the appliance manufacturer's 68,000 employees worldwide. Whirlpool's compensation requirements vary by country, and the company is able to modify its processes on a country-by-country basis, says Abby Luersman, vice president for HR solutions at Benton Harbor, Mich.-based Whirlpool. At the same time, Convergys is using SAP software worldwide to deliver the Web-based services, so Whirlpool gets the benefit of global data consistency.

"Our HR generalists can leverage data globally around issues like diversity reporting and talent pool management," Luersman says. "We have one global [software] platform, with consistency and standardization."

3 How will users be affected?

The biggest change with an MSP arrangement is that users can now bypass internal IT organizations. At the same time, users should expect to interact with the MSP in a more structured, disciplined way than they interact with internal IT, experts say. MSPs are very process-oriented, and there is a clearly defined set of steps users will need to take to obtain support or make a change. These are established at the beginning of the customer/MSP relationship via service-level agreements or contracts.

"There's a scripted nature to interacting with an MSP versus running down the hall and grabbing some IT guy and saying, 'Fix this now,'" says Slavin.

Another key difference is that many MSP-provided services are typically purchased by individual lines of business rather than a centralized procurement or IT organization, notes Damien Bean, co-founder of CareerCurrency LLC, an MSP that offers online training services.

"The structure and pricing [of MSPs] allow end-user departments to now engage services directly and pay from their own operating budgets. Hence, the ability to bypass IT," he says.

4 Where do the savings come from?

Typically, there are little or no cost savings in the conventional sense. What MSPs offer is "cost predictability," says Robert McNeill, an analyst at Forrester Research Inc. in Cambridge, Mass. "There's also cost flexibility in that you can switch services on and off," McNeill says.

Pulte Homes Inc., a $12 billion homebuilder in Bloomfield Hills, Mich., has a contract with Siebel Systems Inc., which was recently acquired by Oracle Corp., for Siebel's CRM On-Demand services. "But we didn't go after it for the cost savings," says Jerry Batt, CIO at Pulte.

Batt compares the economics of contracting with an MSP to those of leasing a new automobile instead of buying it. "The cash outlay overall is more if you lease, but you have upfront costs if you buy," he says. In contracting for a service, Pulte obtained the latest and most sophisticated technology right away at a much lower upfront cost than it would have incurred had it bought and built its own CRM system, Batt notes.

TPI's Slavin says customers shouldn't consider MSP services in terms of potential cost savings anyway. "There's not a straight-up IT cost savings, because the MSP is usually providing some service that the current internal IT infrastructure couldn't have done," he says. It's more about results, such as gaining access to a new customer set, expanding your business or reducing your time to market, he says.

5 What's the exit strategy?

Whirlpool's Luersman recommends that users take particular care in working out this part of an MSP contract. She also recommends building very specific timelines and details into the contract upfront. For example, if Whirlpool has a fluctuation in its employee head count or needs to change a business process as a result of an acquisition, Convergys has a 60-day window to work through and change all of the services it provides.

Bill Martorelli, another analyst at Forrester, says users should also be sure to include change-of-ownership provisions in all contracts with MSPs. Over the past few years, Martorelli notes, there has been an ongoing consolidation in the MSP market. "If a new owner takes the acquired MSP in a different direction, the user wants to be able to get out of the contract," he says.

Even more important to consider is a replacement strategy, says CareerCurrency's Bean. "Exit strategies are an important consideration, but it may be time to also reconsider IT's inherent reluctance to outsourcing," he says. "The proper question relating to an exit strategy is not how do we get out of something but how do I replicate the underlying process somewhere else. It's about protecting the investment."

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