Smith’s Information Services
Data Outsourcing Analysis and Recommendation Executive Summary
Smith’s Information Services is an information Services Company located in Lexington, Massachusetts. The company is a growing company with a good future outlook of growing the business. However, the company has growing costs connected to costs of running the data centers. The company has a goal to reduce overhead and possibly utilizing outside services to reach that goal. Smith’s Information Services goals falls within the typical outsourcing services offered by IT outsourcing companies (data center operations). The company’s assessment is that running a data center is getting cost prohibitive and that is backed up by studies done by the U.S. Department of Energy.

Data Center Energy Analysis
Data centers can consume up to 100 times more energy versus a regular office building. In addition, less that 15% of our energy consumption is being used towards the use of information technology equipment.

The energy that data centers like ours are using has doubled from 2000 to 2006. That equates to 60 billion kilowatt hours per year. The projection says that number doubled again in 2011. The Environmental Protection Agency (EPA) prepared Figure 2 below to outline data center energy consumption from 2000 through 2006 with multiple scenarios depicting continued growth through 2011.

Source: U.S Department of Energy, Data Center Energy Consumption Trends, Retrieved from http://www1.eere.energy.gov/femp/program/dc_energy_consumption.html

Planning Stage
As part of the planning stage, Smith’s Information Services weighed the benefits of such a move within the company. We also made sure that moving our data center services is something that is viable in today’s outsourcing industry. It seems that our goals are aligning to trends we see in the market today. Source: Outsourcing Essentials, Retrieved from http://www.outsourcing.com/content/02i/other/oe/q403/saving-money.html
Benefits
Some of the possible benefits include:
• Cost Savings – reducing the costs associated with running a data center o Cooling Costs o Hardware costs (Computers, storage, servers) o Software Costs o Overall Electricity o Employee cost to staff the data center
• Increase ability to concentrate on the Services they provide to customers
• Infusion of Capital through selling of existing data assets
• Flexibility to move to newer technologies in shorter period of time
• Larger pool of skills and resources
• Better access to new methodologies/Technology
• Reduction in employee related expenses (training)
• Greater Flexibility

Sample analysis of another company outsourcing Data Center activities (IT) to managed hosting environment. Source: IT Infrastructure Outsourcing Benefits Demystified, Retrieved from http://www.scribd.com/ctrlsdatacenter/d/45182927-IT-Infrastructure-Outsourcing-Benefits-Demystified
Risks
There are some inherit related risks that the company considered:
• Some loss of control as vendors will now be running the data center operations.
• Inability to control what costs the vendor occurs which may result contract price increases over time.
• Additional liability for actions taken by any vendor contracted
• Difficulty bringing process back in house at some time in the future
• Reduced flexibility in terms of how things are handled in the data centers
• Security of the Data lies with the vendor
• Possible negative perception of outsourcing to our customers
• Adherence to Service Level Agreements
These factors further support that we precede with outsourcing our data centers because the advantages outweigh the disadvantages in today’s financial climate. Investors are looking to maximize profit and looking for companies to reduce costs and wasteful spending. It will help our stocks bottom line if we can show an infusion of capital by outsourcing this contract. Also, by reducing our operating costs this also allows the company to focus on providing more services and create potential additional revenues for marketing.
Considerations
Defining Scope of what the vendor will provide in terms of data management should be well defined. Within that scope we should be defining service level agreements with vendors is imperative so that we can ensure that our customers are receiving the service levels that meet company standards. In addition, those service levels should be compared against industry standards to ensure that Smith’s Information Services is considered one of the top providers in the industry. The vendors should be held to those standards.
Budget considerations are key. Smith’s Information Services must define a budget to make sure that any vendors that we seek a Request for Proposal fall within the company’s budgetary goals. Reviewing those vendors which can operate with the company’s financial goals is key to outsourcing the data center.
Both short term and long terms goals should be clearly defined. The company has a shorter terms goal of reducing the costs of running a data center. However, it would be beneficial to know if this is a long term strategy as well. Costs in the future could decrease based on technology and the company might want to bring those functions in house again at some point. If the long terms goal is to look at outsourcing other functions within the company, does the vendor we select have that expertise. It might be beneficial to select a vendor with expertise in addition to data center operations.

Vendor Information
We should target between 3 to 8 vendors that have the expertise required to outsource the data center. We should do vendor research which includes getting Requests for Information (RFI) for the following types of information
• Obtain vendor information from industry reports/surveys.
• Look at industry publications.
• Talk to other outsourcing customers.
We should also review Vendor information that will analyze experience and resources. Some examples would be:
• Issuing a RFI
• Talking to outsourcing clients
• Visiting outsourcing clients' sites
• Visiting vendor sites
• Checking customer's previous experience with vendor
• Performing a newspaper search for recent articles
• Checking litigation involving vendor
• Obtaining annual reports
• Obtaining industry surveys/reports
Since Smith’s Information Services is losing some level of control by outsourcing, the data elements above are key to mitigate risk and establish that the vendor that we are contracting can meet our data center needs necessary to service our clientele. Establishing vendor reputation and financial stability are key considerations so that it doesn’t put SIS in a position to halt services to its customers. We could possibly bypass the RFI process in favor of a Request for Proposal because much of the same information.
We will need to request formal proposals (RFP) from the vendors whom we wish to get formal bids from. I strongly recommend using the RFI information above to narrow the list of vendors to 2 or 3 so that we can get competitive bids. If a vendor becomes aware that we are only soliciting their services it might have the following disadvantages:
• Impact on pricing and service level commitments between data center vendors
• No way to compare pricing to know if we are getting a competitive offer
• Vendor might be less flexible to meet our demands for data center service.
• Lose any leverage that might be obtained by letting the vendor know of competition

Assessment Criteria
There are many aspects to consider in terms of assessment criteria. However, it’s important to rank each vendor accordingly so that you can assess the best fit for the company. We can rank each vendor accordingly.
We can rank the vendors in each category 1 to 10 (1=poor, 5=acceptable and 10=outstanding).
The key criteria are as follows:
Evaluation Criteria Reason:
Proposed Solution Methodology
• Technology (hardware/software/network) Committed resources
• Innovativeness
• Flexibility Fit with customer's environment/organization
• Willingness to share risk This is an important criterion as this directly will impact on the ability to deliver service to customers. You need the new data center to be efficient, stable and have the ability to adapt as new technologies arise.
Ability to Deliver Services Experience/skill levels of staff
• Methodologies
• Technology (hardware/software/network)
• Vendor reputation
• Vendor experience
• Proposed implementation schedules
• Physical security
• Data security
• Disaster recovery/business continuation These criteria will help us determine how good of a fit the vendor is for what we need. Do they have the technology that meets our needs? Do they have a good track record for servicing customers? How long have they been in the business? How quickly can they service us? What is their security like?

These things are critical because they not only paint a picture if the vendor can support us but if the vendor has the ability to mitigate risk and secure our data.
Ability to Meet Performance Standards
• Methodology
• Proposed service levels
• Remedies for failing to meet service levels Benchmarking services Benchmarking service levels It’s important to clearly define with the vendor how their success will be measured. Are their business methodologies they use that can co-exist with your own? Those service levels must be defined and you must work out what the consequences are for not meeting those service levels (i.e. contract terminated).
Financial Proposal
• Base pricing
• Variable pricing
• Cost savings
• Savings commitments
• Budget comparison
• Ability to increase or decrease services
• Cost-of-living adjustments
• Taxes Payment schedule At the end of the day because your trying to mitigate spiraling costs of running a data center we must know what the vendor is proposing in terms of costs. Are their aspects of the contract fixes versus variable? We must compare the overall cost of the proposed contract with the our current costs to determine savings. We also might ask for additional services or reduction in services and you must know how that will be handled. This criteria should paint you a comprehensive view of costs.

Business Process Outsourcing
We should involve our legal representation in any issues around contracts. Legal counsel that has the interests of Smith’s Information Services is imperative to ensure that we mitigate risk and that the complexities and need of the business is well represented in any contract agreements. This will include but not be limited to scope, compliance and duration of the contract.
One of the key decision points for Smith’s Information Services is should the company outsource to a local, national or international data center. Each has pros and cons. Here is a table that breaks out each:
Data Center Analysis
Type of Data Center Pros Cons Timeline
Local • Maximized face time
• Positive local press supporting local economy and job market
• Ability to hire local talent
• Opportunities to utilize vendors employee pool for future positions in company
• May not be as expensive as National data centers depending on state taxes and salary averages
Short Term Considerations
Can outsource quickly
Long Term Considerations
• Less of risk because locally managed
• Vendor manages improvement of facilities, Software & hardware • Might have to pay going rate for your local economy which could as expensive as other options.
• Could have aspects of vendor operations outsourced
Short Term considerations
Might take a while to train employees on your operations
Long Term Consideration
Must be defined in case ever moved in house • Faster transition from your data center to local one.
• Staffing of your current data center could assist in staffing for vendor if needed.
• Locality could probably mean faster negotiations with contracts
Well Known (National) • No cultural or language barriers
• Minimal Time Zone impacts
• More opportunities for face time
• Higher quality of service
Short Term Considerations
Faster transition versus International
Long Term Considerations
Vendor manages improvement of facilities, Software & hardware • Higher cost versus International
• Face time meetings are more time consuming with added cost if across country
• Some aspects of vendors operations might be subcontracted
Short Term Considerations
Time and costs might be higher during setup if Vendor is across the country
Long Term Considerations
• Financial stability of vendor in the long run you have no control over.
• Face time might be slightly less versus local data center • Faster transition from your data center versus overseas but slower versus local

• Locality could probably mean faster negotiations with contracts
Overseas (International) • Low Cost (salaries)
• No facility cost
• Time differential can benefit service (off hours)
Short Term Considerations
Projected cost savings
Long Term Considerations
Larger cost savings over contract life • Quality of Service lower
• Managing people difficult
• Fluctuating monetary valuations
• Language Barriers
• Time zone difficulties
Short Term Considerations
Slower transition
Long Term Considerations
Harder transition back in house • Longer time to transition from your data center to overseas
• More time consuming for negotiations
• More complexity in laws for contracts

Recommendation
Hi recommend that we consider a local call center or National call center depending on the overall cost. This might be more expensive versus going international but the benefits of keeping these jobs domestic make up for the increase in costs provided that they meet our goal of reducing call center operational costs. Aside from good public awareness that we support our own economy and job growth there are other benefits like not having a language or cultural barrier. In addition, the quality of service is important and we will get better customer service domestically versus internationally. International call center poses risks to our timeline of outsourcing the data center or introduces issues with time zone differences, managing the people associated with the call center.
Contract Types:
Contract Type Pros Cons
Lump Sum • Can be used in competitive bidding to receive the lowest fixed price
• Can use incentive rewards to keep contractor on schedule and budget
• Easy to track budget and nail down final costs • Seller may come in with a low-cost strategy and then increase final cost through change orders
• Depending on financial risk, some contractors may not bid on a fixed-fee contract
• Quality is harder to control
Unit Price • When units of work can be quantified and appropriately priced, it works well
• Can use incentive rewards to keep contractor on schedule and on budget • Bottom-line cost is difficult to estimate
• Little to no schedule motivator
• Should not co-mingle with cost-reimbursement contracts
Cost Reimbursement • Effective when schedule is high priority
• Allows contractor to increase personnel and overtime without incurring financial losses • Contractor’s motives may be misaligned with buyers
• Bottom-line cost is difficult to estimate
Time & Materials (T&M) • Easiest to use with no scope defined
• Can use same contractor or team of contractors for various projects as they come up • Little to no way to estimate budget
• Contractor has little incentive to be efficient

Recommendation
I would recommend the Lump Sum Contract regardless of data center location. One of the main goals is reduce costs associated with running our own data center. As we except bids this will make it easier to quantify savings compared to current costs. This will make it easier to identify a budget and track to the budget for the outsourcing costs. In addition, we can use an incentive rewards to give the vendor incentive to meet or exceed SLA’s and quality customer service goals.
I would recommend against unit pricing contracts because the bottom line pricing is harder to evaluate. Also, it would be hard to determine the definition of a “unit” when it comes to data. This could lead to a very complex contract structure. Cost Reimbursement was considered but that contract type makes it difficult to determine bottom line costs. The Time and Materials contract also did not meet our cost criteria and is typically used with no defined scope.

Conclusion
I think Smith’s Information Services should move ahead with plans to seek out a vendor to outsource our data needs. The cost saving the company would see will allow the company to focus on the types of services we provide and working with our customers. The capital infusion with cost reduction will be seen as a positive to our shareholders. We will also save costs in terms of staffing, support, hardware, software and energy costs associated with running our own data center.
I strongly recommend going with either a local or well-known national call center vendor. Though its cost will be more than international, the advantages of keeping the call center domestic more than make up for any cost increase incurred by not using an international vendor. We will be supporting local economies and job markets which is positive publicity for the company. In addition, there are more opportunities to interface that vendor at a reduced cost of time and money.