information technology outsourcing transactions process strategies and contracts 2nd ed phần 6 pps

302 Ch. 5 Exhibits
New Releases
Enhancements
Replacements
Additional Software
System Monitoring
Performance Tuning (Systems/Applications)
Problem Resolution
Backup/Recovery
Vendor/Subcontractor Performance
Reporting
• Applications Software
Requirements
Procurement
Development/Enhancement of Packages
Acceptance Testing
Maintenance
Upgrades
New Releases
Enhancements
Replacements
Additional Software
Government/Regulatory Changes
Training
Development (see below)
Problem Resolution
Backup/Recovery
Vendor/Subcontractor Performance
Reporting
• Database Administration
Requirements

Modeling
Design
System Maintenance
User Access
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5.3 Checklists 303
Capacity Planning
Performance Management
Backup/Recovery
Problem Resolution
• Telecommunications
Scope
Voice
Data
Facsimile
Electronic Data Interchange (EDI)
Technical Requirements
Voice/Data Network Management
Network Connectivity and Operations
Bandwidth Management
Hardware Operations
Hardware Maintenance
Vendor Dispatch/Coordination
Problem Resolution
Cabling/Wiring
Project Planning
Hardware/Software Installation (Remote Sites)
Systems/Applications Software Operations
Systems/Applications Software Maintenance
Data Lines Management

Telephone Instruments/Stations
Local/Long Distance
Telephone Directory Publication/Maintenance
Telephone Operators
Voice Mail
Product Evaluation
Product Procurement
Capacity Management
Performance Management
Change Management
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304 Ch. 5 Exhibits
Problem Management
Recovery Management
Configuration Management
Inventory Management
Facilities
Quality Assurance
• LAN Network
Technical Requirements
LANs/Servers—Equipment and Software
Management, Operations, and Maintenance
Third-Party Vendor Management
Additional, Replacement, Upgrades
PCs/Workstations
Management, Operations, and Maintenance
Third-Party Vendor Management
Additional, Replacement, Upgrades
Cabling/Wiring
Product Evaluation

Product Procurement
LAN Network
Design
Project Planning
Problem Resolution
Capacity Management
Performance Management
Change Management
Problem Management
Recovery Management
Configuration Management
Inventory Management
Facilities
Quality Assurance
• Data Transmission
Current and Future Methods of Data Transmission
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5.3 Checklists 305
Financial Responsibility for Data Transmission
Management/Financial Responsibility for Contracts with Third Parties
(e.g., subscriber agreements)
• Desktop
Scope—Existing and New Devices
Fixed-Function Terminals
PCs—Desktop, Laptop, Mobile
Other Workstations
Servers
Routers
Bridges
Hubs

Associated Modems, Cards, Interface Boards, Printers, Cabling,
Supplies, and Accessories
Technology Selection
Technology Standards
Corporate/Site-Specific Guidelines
Catalog for Standard Products and Services
Configuration and Design Assistance
Compatibility Assurance
Design Assistance
Evaluation Lab
Deployment Strategy
Procurement
Acquisition Services/Assistance
Acquisition and Approval Process
Track and Report Order Status
Delivery/Shipping
Installation
Moves, Adds, and Changes
Delivery Process
Installation Hardware/Software
Office
Remote
Field
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306 Ch. 5 Exhibits
Network Provisioning
System Setup Requirements
Testing
Removal of Packaging Materials
Systems Management

Technical Support
Capacity Management
Performance Management
Change Management
Problem Management
Recovery Management
Configuration Management
Inventory Management
Quality Assurance
Maintenance
Preventive Maintenance
Problem Management/Resolution/Escalation
Identify, Track, Report, and Initiate Resolution of Problems
Interface with Hardware/Software Vendors
Inventory of Replacement Parts
Repair Service—On-Site/Carry-In
Upgrades
New Releases
Asset Management
Inventory
Tagging Assets
Loading of Databases
Track Move, Adds, and Changes
Ensure License Compliance
Register/Verify/Track Warranties
Technology Disposal
Resale assistance
Reuse procedures
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5.3 Checklists 307

• Help Desk Services
Location
Centralized vs. Dispersed
Levels of Support (Level 1, 2, 3)
Receive, Log, and Track Calls
Call Tracking System
Toll-Free Number
Languages Spoken at Help Desk
Support Standard/Nonstandard Systems
Hours of Operation
Change Management
Root Cause Analysis
Remote Site (Store) Support
Support Rollout of New Systems
Coordinate with Third-Party Vendors
Escalation Procedures
Administration Support
Coordinate Equipment/Parts Distribution
Issue Supplies
File Transfers
Control File
Inventory Control
Polling
Asset Management
Warranty Management
Services Management
Reporting
Number of Calls Received
Number of Calls Answered
Response Time

Priority of Calls Received
• Application Development Services
Procedures for Requesting/Receiving Proposals
Baselines
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308 Ch. 5 Exhibits
Measurement Metric
Person Hours
Person Days
Function Points
Other Methodology
Services
Upgrades
New Releases
Enhancements
Government and Regulatory Changes
Training
Reporting
Development Process
Development Request
Submit Proposal
Develop Plan
Design
Coding
Documentation
Testing
Acceptance
Implementation
Support
Prioritize Projects

Training Quality
Assurance
• Disaster Recovery Services
Customer’s Current Disaster Recovery Plan
Will Customer’s Current Plan Be Terminated?
Location of Vendor Hotsite
Hotsite Configuration
Customer Priority at Vendor Hotsite?
Response/Recovery Times
Scope of Vendor Services
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5.3 Checklists 309
Notification Procedures
List of Customer/Vendor Contacts
Identify/Prioritize Critical Services
Escalation Procedures
Periodic Testing of Plan
Allow for Growth
• Data Security Services
Data Security
Controls to Detect and Report Intentional or Accidental Invalid Data
Access Attempts
Installation, Maintenance, Upgrade of Existing/New Data Access Con-
trol Software
Protect Application Resources via the Access Control Software
Protect End User Data via Access Control Software
Security Procedures Manual
Establish, Change, Deactivate, and Remove Logon IDs
Review, Approve, and Grant Request for Privileged User Authorities
Notify Data Owners and Customer of Invalid Data Access Attempts

Emergency Security Requests
Controls for Printed Output from Unauthorized Access while under
Vendor Control
Knowledge of Latest Concepts/Techniques Associated with System and
Data Security
Storage and Security for Portable Media
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310
APPENDIX
5.1
EMPLOYEE CONFIDENTIALITY
AGREEMENT
1
My full name is [EMPLOYEE NAME] and I am employed by or acting as a
consultant to Vendor (“Vendor”).
I understand and agree that I will have access to Confidential Information dur-
ing my employment [consultancy] with Vendor. In consideration for and as a
condition to my employment by Vendor [assignment to the CUSTOMER
account], I agree to be bound by the terms set forth herein.
For the purposes of this agreement, “Confidential Information” means materi-
als, data, processes, methodologies, tools, business and technological informa-
tion, software programs and code, intellectual property, and other information,
including individually identifiable medical, dental, or financial information,
regardless of form, media, or whether conveyed orally, in writing or electroni-
cally, belonging or relating to Vendor and its clients and their direct and indirect
subsidiaries and affiliates.
I hereby understand and agree:
That any and all Confidential Information shall be deemed by me to be highly
confidential and proprietary in nature having substantial intrinsic and/or
monetary value.

That unauthorized use or disclosure of Confidential Information will likely
result in substantial monetary and other damages to Vendor and its cli-
ents and their direct and indirect subsidiaries and affiliates and will sub-
ject me to disciplinary action, including termination of employment,
civil and criminal legal proceedings, and recovery of monetary damages
as may be determined in a court of law.
Not to deliver to or disclose or otherwise make available to anyone any Confi-
dential Information except as authorized in writing by Vendor and its
clients and their direct and indirect subsidiaries and affiliates regardless
of the term of this agreement.
1. Note: This sample agreement is intended to illustrate the types of legal issues that vendors typically
wish to address in connection with information technology outsourcing transactions. The provisions
included in this sample agreement, while comprehensive, may not cover all of the issues that may
arise in a particular transaction. Legal issues will likely vary depending on the type of information
technology process being outsourced and the scope of the outsourcing transaction. This sample
agreement or any part thereof should only be used after consultation with your legal counsel. Legal
counsel should be consulted prior to entering into or negotiating any outsourcing transaction.
Halvey.book Page 310 Tuesday, August 9, 2005 8:58 AM
Appendix 5.1 Employee Confidentiality Agreement 311
That Confidential Information, and all copyright, patent, and other proprietary
rights therein, shall remain property of Vendor or its clients or their
direct and indirect subsidiaries and affiliates, as the case may be, at all
times and that I shall on demand return it to Vendor within 24 hours of a
written or oral demand.
That during the course of my employment, I may work on and be a part of the
development of technology, processes, methodologies, and other work
product for Vendor. I hereby assign to Vendor any technology, pro-
cesses, methodologies, and other work product developed by me and
such technology, processes, methodologies, and other work product
shall become the sole and absolute property of Vendor.

That any and all inventions, improvements, discoveries, technologies, pro-
cesses, methodologies, and other work product developed or discovered
by me as a result of my employment at [or consultancy with] Vendor
shall be fully disclosed to Vendor, and I hereby assign the same to Ven-
dor and the same shall become the sole and absolute property of Vendor.
Upon the request of Vendor, I shall execute, acknowledge, and deliver
such assignments and other documents as Vendor may consider neces-
sary or appropriate to vest all rights, titles, and interests therein to Ven-
dor.
That the disclosure of Confidential Information may give rise to irreparable
injury and acknowledge that remedies other than injunctive relief may
not be adequate. Accordingly, Vendor and its clients and their direct and
indirect subsidiaries and affiliates have the right to equitable and injunc-
tive relief to prevent the unauthorized disclosure of Confidential Infor-
mation, as well as such damages or other relief as is occasioned by such
unauthorized use or disclosure.
That I am bound by the obligations under this agreement until such time as
said Confidential Information lawfully becomes part of the public
domain.
This agreement shall be governed by and construed in accordance with the
laws of the [STATE], excluding its conflicts of laws provisions.
This agreement sets forth the entire agreement between Vendor and me as to
the subject matter of this agreement. The terms of this agreement shall not be
amended or modified except in writing signed by each of Vendor and me.
____________________________________
SIGNATURE
____________________________________
DATE
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312

APPENDIX
5.2
CUSTOMER SATISFACTION SURVEY
CHECKLIST
2
1. Define general categories that are to be measured by the satisfaction sur-
vey. What are the areas of concern that the survey is targeting? Exam-
ples of measurements include:
C Delivery
C Performance
C Support
C Responsiveness
C Quality
C Cost
C Value
C Business relationship
2. Develop specific questions to ask in the survey for each category. For
example, with respect to cost, identify areas of interest and focus ques-
tions on those areas, such as the following:
C Baseline costs (designated fees)
C Application development costs
C Incremental costs
C Project costs
C Cost-of-living adjustments
C Baseline adjustments
C Add/delete business units
(See specific topics in (7) below).
2. Note: This checklist is intended to illustrate the types of legal issues that customers may wish to con-
sider in connection with contracting for application services. The items included in this checklist may
not cover all of the issues that may arise in a particular transaction. Legal issues will likely vary de-

pending on the type of service being provided and the scope of the services. This checklist or any
part thereof should only be used after consultation with your legal counsel. Legal counsel should be
consulted prior to entering into or negotiating any transaction covering the provision of application
services.
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Appendix 5.2 Customer Satisfaction Survey Checklist 313
3. Determine the frequency with which the survey will be distributed:
C Monthly
C Quarterly
C Semi-annually
C Yearly
• Calendar year
• Contract year
4. Develop a mechanism to rate or score the vendor’s performance. For
example:
5 = Excellent
4 = Very Good
3 = Good
2 = Fair
1 = Poor
0 = Unacceptable
0–10 with:
10 = Exceptional
8 = Exceeds Expectations
5 = Meets Expectations
3 = Below Expectations
0 = Unacceptable
5. Decide how index will be computed and reviewed. The results should be
reviewed with the account managers and published in the monthly
account status report.

6. Determine group to be surveyed (e.g., end users, executives, both).
7. Examples of topics to be surveyed follow.
DELIVERY
• Ability to provide products and services that contribute to business
success
• Delivery of products that perform as specified
• Ability to roll out new systems
• Implementation of updates, changes, enhancements, or new releases
with minimal disruption
PERFORMANCE/SUPPORT
• Ability to meet service levels
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314 Ch. 5 Exhibits
• Uptime
• Continuous improvement
• Dependable and accurate performance of products and services
• Technical ability
• Open/productive communication between customer and vendor personnel
• Degree to which contractual terms and conditions have been met
• Use of proper resources on a timely basis to satisfy customer’s business
needs (e.g., providing emergency contacts or the assistance in interact-
ing with other organizations to resolve problems)
RESPONSIVENESS
• Willingness to help customers and provide prompt service
• Response to customer questions and requests
• Willingness to take the initiative to identify problems and improvements
and new technologies
• Personal attention
• The timeliness of requested program change
QUALITY

• Quality of equipment, software, and services
• Appearance of staff, equipment, documents, and facilities
• Vendor understanding of customer industry
• Vendor experience
• Vendor expertise/know-how
• Demonstration of interest, understanding, timeliness, and accuracy
COST
• Accurate/fair pricing
• Competitive pricing
• Delivery in cost-effective manner
• Ability to keep costs down with minimal impact on quality
• Perception of the quantity and quality of services received for the time,
effort, and money invested
• Willingness to share in risk
• Flexibility
• No surprises
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Appendix 5.2 Customer Satisfaction Survey Checklist 315
VALUE
• Problem identification and resolution
• Ability to identify improvement opportunities
• Application of innovative solutions
• Degree to which vendor demonstrates leadership in customer industry
• Flexibility in approach
• Impact vendor has on customer’s businesses
• Information provided regarding new products and services
BUSINESS RELATIONSHIP
• Ability to breed confidence based on professionalism and knowledge of
industry and business
• Understanding of and sensitivity to customer’s business goals, objec-

tives, and needs
• Ability of vendor and customer to work together in the outsourcing
arrangement
• Vendor commitment to customer’s success
• Overall rating of vendor’s performance
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316
APPENDIX
5.3
GENERAL ASSIGNMENT AND BILL
OF SALE AGREEMENT
3
THIS GENERAL ASSIGNMENT AND BILL OF SALE is entered into this
[NUMBER VARIATION] day of [MONTH] [YEAR], by and between [], a []
corporation (“Purchaser”) and [], a [] corporation (“Seller”).
W I T N E S S E T H:
WHEREAS, Purchaser and Seller are entering into an Agreement dated
[DATE] (the “Services Agreement”); (capitalized terms not defined herein shall
have the meanings ascribed to them in the Services Agreement);
WHEREAS, pursuant to the Services Agreement, Seller has agreed to sell and
Purchaser has agreed to purchase the Assets on the Effective Date; and
WHEREAS, Seller desires to transfer and assign the Assets and Purchaser
desires to accept the transfer and assignment thereof.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Seller hereby irrevocably sells, transfers,
conveys, and assigns to Purchaser all of Seller’s right, title, and interest in the
Assets, TO HAVE AND TO HOLD the same unto Purchaser, its successors, and
assigns, forever.
Purchaser hereby accepts the sale, transfer, conveyance, and assignment of

the Assets.
At any time or from time to time after the date hereof, at Purchaser’s request
and without further consideration, Seller shall execute such other instruments of
transfer, conveyance, assignment, and confirmation; provide such materials and
information and take such other actions as Purchaser may reasonably deem nec-
essary or desirable in order more effectively to transfer, convey, and assign to
Purchaser; and confirm Purchaser’s title to, all of the Assets, and, to the full
extent permitted by law, to put Purchaser in actual possession and operating con-
3. Note: This sample agreement is intended to illustrate the types of legal issues that vendors typically
wish to address in connection with information technology outsourcing transactions. The provisions
included in this sample agreement, while comprehensive, may not cover all of the issues that may
arise in a particular transaction. Legal issues will likely vary depending on the type of information
technology process being outsourced and the scope of the outsourcing transaction. This sample
agreement or any part thereof should only be used after consultation with your legal counsel. Legal
counsel should be consulted prior to entering into or negotiating any outsourcing transaction.
Halvey.book Page 316 Tuesday, August 9, 2005 8:58 AM
Appendix 5.3 General Assignment and Bill of Sale Agreement 317
trol of the Assets and to assist Purchaser in exercising all rights with respect
thereto.
This General Assignment and Bill of Sale may be executed in any number of
counterparts, each of which will be deemed an original, but all of which together
will constitute one and the same instrument.
This General Assignment and Bill of Sale shall be governed by the laws of the
State of [STATE]. Purchaser and Seller agree that the Federal courts of [***]
shall have exclusive jurisdiction over disputes under this General Assignment
and Bill of Sale, and the parties agree that jurisdiction and venue in such courts
is appropriate.
IN WITNESS WHEREOF, the undersigned have caused their duly authorized
officers to execute this General Assignment and Bill of Sale on the date first
written above.

[PURCHASER]
By: _______________________
[NAME]
[Title:]
[NOTARIZE]
[SELLER]
By: _______________________
[NAME]
[Title:]
[NOTARIZE]
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318
APPENDIX
5.4
EXAMPLE OF JOINT MANAGEMENT
PROCEDURES
I. GENERAL
The Parties acknowledge that Vendor is providing services under this Master
Agreement that are critical to the overall operations and business of Customer. In
the event of a Critical Failure (as defined below), Customer will not be able to
effectively carry out critical business functions. Therefore, the overarching objec-
tive of the Parties is for Customer to receive the Services in accordance with the
Service Levels, thereby allowing Customer to meet its business and financial obli-
gations. In the event of a Critical Failure, in an effort to minimize harm and dis-
ruption to the operations and business of Customer, Customer may request to, and
if so requested Vendor shall allow Customer to, participate in the remediation of
the Service failures or deficiencies and to implement the joint management pro-
cedures described herein (the “Joint Management Procedures”).
II. JOINT MANAGEMENT PERIOD
The period during which the Joint Management Procedures shall be in effect shall

commence as of the time specified in the notice from Customer of its desire to
implement the Joint Management Procedures and continue until the date termi-
nated by Customer, which termination date shall not be later than (a) the date that
Customer notifies Vendor that the Services are being performed in accordance
with the Service Levels for two consecutive reporting periods and provision by
Vendor of adequate assurances that the Service shall be provided in accordance
with the Service Levels on an ongoing basis or (b) the End Date in the event this
Master Agreement is terminated (the “Joint Management Period”).
III. CUSTOMER PARTICIPATION
Upon the implementation of the Joint Management Procedures, Customer may
take such actions as are necessary or recommended to remediate any service fail-
ures or deficiencies in accordance with this Exhibit. It is the objective of the Par-
ties to remedy any Critical Failure immediately and provide all Services in
accordance with the Service Levels. Customer may participate in its discretion in
the remediation of any service failure or deficiencies, including sending
resources to the Service Locations to assist in, and where considered appropriate
by Customer assume management and/or operational control over, all or a por-
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Appendix 5.4 Example of Joint Management Procedures 319
tion of the Services. In connection with such participation, Vendor shall provide
to Customer and its representatives access to (and hereby grants Customer and
its representatives the right to Use and operate) the Vendor Service Locations
and the resources and assets contained therein (including personnel resources,
hardware, and software) solely in connection with the provision of the Services.
Customer shall have the right to, and Vendor shall assist Customer in, deal
directly with (a) members of the Vendor Personnel, including Key Vendor Per-
sonnel, and (b) Vendor Agents, as may be necessary or recommended to facili-
tate the ongoing provision of the Services in accordance with the Service Levels.
Customer’s participation during the Joint Management Period may be in an
assistance or management role (or increase from an assistance to a management

role) depending on the severity of the Critical Failure, as follows:
1. Upon the occurrence of a Level 2 Critical Failure (as defined below),
Vendor shall have five Business Days to develop and implement a plan
to remedy the failure, during which time Customer may at its discretion
assist Vendor in the develop and implementation of the plan and the
management and provision of the Services. If Vendor is not providing
the Services in accordance with the Service Levels within the next
reporting period to Customer’s reasonable satisfaction, Customer may at
its discretion assume control of the management and operation of the
Services for the remainder of the Joint Management Period.
2. Upon the occurrence of a Level 1 Critical Failure (as defined below),
Customer may at its discretion assume control of the management and
operation of the Services during the Joint Management Period.
3. Customer may at its discretion reduce its role (if applicable) from con-
trol of management and operation of the Services to an assistance role.
As used herein, “Level 2 Critical Failure” means any failure to meet a Service
Level.
As used herein, “Level 1 Critical Failure” means ________________.
As used herein, “Critical Failure” means a Level 1 Critical Failure or a Level 2
Critical Failure.
IV. VENDOR COOPERATION
Vendor shall cooperate fully with Customer’s efforts to remedy the critical fail-
ures and remediate Service failures and deficiencies in provision of the Services
in accordance with the Service Levels as set forth in this Schedule. Such cooper-
ation shall include upon Customer’s request:
• Provision of technical information and technical assistance
• Access to and provision of personnel resources
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320 Ch. 5 Exhibits
• Access to technology and third party resources

• Access to Service Locations
• Access to benchmark and historical information
V. ROOT CAUSE ANALYSIS AND REMEDIATION PLAN
As part of the Joint Management Procedures, Vendor shall work with Customer
to (a) perform a root cause analysis of the service failures and deficiencies in an
effort to identify, and develop a plan to remediate, the failures and deficiencies
in the provision of the Services in accordance with the Service Levels, and (b)
develop and implement a plan to remediate the failures and deficiencies (if such
a plan is practicable in Customer’s discretion). If Customer so directs, all efforts
and prioritization and use of resources during the Joint Management Period shall
be directed or otherwise approved by Customer or its representative.
VI. RESPONSIBILITY FOR VENDOR PERSONNEL AND RESOURCES
The employees and consultants of Vendor and Vendor Agents shall remain
employees and consultants of Vendor and Vendor Agents during the Joint Man-
agement Period. Vendor shall, and shall cause Vendor Agents to, retain and
compensate (including salary and benefits) all Vendor Personnel during the Joint
Management Period unless otherwise approved or directed by Customer. Cus-
tomer shall not be deemed an employer of any Vendor Personnel during the
Joint Management Period.
Vendor shall maintain and continue to have financial and, unless otherwise
directed by Customer, operational, maintenance, and administrative responsibil-
ity for all hardware, software, Vendor Service Locations, and other resources
used in connection with the Services during the Joint Management Period.
VII. RIGHTS DURING JOINT MANAGEMENT PERIOD
During the Joint Management Period, Customer shall be responsible for the xxx
Fees as set forth in the Master Agreement. Customer shall not be responsible for
any other fees or costs incurred by Vendor in connection with Vendor’s cooper-
ation and assistance during the Joint Management Procedures.
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321

CHAPTER
6
FINANCIAL CONSIDERATIONS
1
1. This chapter was originally written by Tim Scudder and has been updated and revised by the authors
for this edition.
6.1 INTRODUCTION 321
6.2 BASE CASE 322
(a) Architecture 322
(b) Financial Concepts 325
(c) Time Frame 335
6.3 RETAINED COSTS 336
(a) In Proposal Comparison 337
(b) In Financial Planning 338
6.4 UNIT VS. TOTAL COST 338
(a) Identifying the Units in Unit
Cost 338
(b) Cost Trends 339
(c) Using Cost Trends 341
6.5 PRICING OPTIONS 341
(a) Pricing Structure 341
(i) Fixed Fee 341
(ii) Rate-Based Pricing 341
(iii) Fixed-Fee and Rate-Based
Pricing 342
(iv) Resource Pool 342
(v) Cost-Plus Pricing 342
(vi) Time and Materials 342
(vii) Pass-Through Expenses 342
(viii) Lump-Sum Payment for

Assets 343
(ix) Spending Commitments 343
(x) Other Cost Considerations 343
(b) Payment Terms 343
(c) No Customer’s Business Remains Static
over the Term of the Outsourcing
Agreement 343
(d) Ongoing Price Reductions 344
(i) May Depend on Pricing
Structure 344
(ii) Productivity Improvements 344
(iii) Market Comparisons 344
(e) Cost-of-Living Adjustments 345
6.6 OTHER FINANCIAL CHARGES 345
(a) Taxes 345
(b) Insurance 346
(c) Expenses 346
(d) Exchange Rate 347
(e) Audit Rights and Requirements 347
6.7 FINANCIAL IMPACT OF CHANGE 348
(a) Transfer Finances 348
(b) Transformation Finances 349
(c) Transfer and Transformation
Funding 349
6.8 PAYMENTS 351
(a) Timing 351
(b) Late Charges 351
(c) Disputes 351
6.9 CHARGEBACK 352
(a) Paying for Chargeback Services 352

(b) Outsourcing an Existing Chargeback
Process 353
(c) Chargeback vs. Charging 354
6.1 INTRODUCTION
Financial considerations tend to dominate all aspects of the outsourcing life
cycle. It is critical, therefore, for a company considering an outsourcing transac-
tion to understand its current financial position so as to assess the feasibility of
cost savings through outsourcing and to evaluate vendor proposals to determine
Halvey.book Page 321 Tuesday, August 9, 2005 8:58 AM
322 Ch. 6 Financial Considerations
if, in fact, they would provide cost savings over the length of the agreement. It is
just as essential to structure an outsourcing agreement in a way that ensures the
customer receives fair and predictable pricing and is able to understand and con-
trol the expenditure of IT dollars.
6.2 BASE CASE
An essential starting point in the outsourcing life cycle is the creation of a base
case, or comparison baseline. The base case is a detailed determination of the
operating costs of the IT services being considered for outsourcing (typically
referred to as the in-scope services). This analysis should summarize annual
costs, starting with the current fiscal year and extending throughout the expected
term of the agreement. Estimates of future costs should take into account reason-
able assumptions regarding future changes to the scope of the series (increases
or decreases, in use) as well as price performance trends of the resources
required to provide the in-scope services. The result of this analysis should be an
accurate representation of the expected costs for the in-house organization to
provide in-scope services over the target term.
There are two reasons for conducting a base case financial analysis. The first
is to establish a basis for performing an outsourcing assessment. A key element
of the outsourcing assessment is comparing actual and projected in-house costs
to the marketplace and expected marketplace cost trends. The purpose is to

establish the magnitude of expected IT expenditure and any anticipated savings
that may be realized through outsourcing. This is essential to both setting man-
agement expectations and deciding whether to proceed further with vendor
solicitation. The second reason for creating a base case is to provide the point of
comparison for vendor proposals. This information will be essential to establish-
ing the business case for entering into an outsourcing arrangement. Senior
management generally needs to be convinced that outsourcing will provide high-
quality services for less than expected internal costs. The only exceptions to this
trend occur when significant quality problems need to be corrected.
(a) ARCHITECTURE. The first step in building the base case is to create a
model (architecture) of how costs will be categorized. A top-down approach is
recommended to streamline the process. The first tier of this architecture, shown
in Exhibit 6.1, categorizes major IT services from the IT customer’s perspective.
There are several advantages to starting with this approach. The first, and per-
haps most obvious, is that it should correspond to the way in which IT customers
view the services they consume, making it easy to communicate. Second, all IT
services can be grouped into a small number of overall categories, which facili-
tates understandability. Finally, a subtle advantage is that it helps the project
team, which is typically dominated by IT professionals, start to change its per-
spective from that of service provider to customer. This is a critical element in
structuring the request for proposal (RFP) as well as the overall outsourcing
agreement.
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6.2 Base Case 323
The simplicity of the model depicted in Exhibit 6.1 belies the complexity
involved in the IT industry. The Application Delivery category, for example, is
composed of a myriad of processing platforms and network protocols. The high-
level approach shown in Exhibit 6.1 must be further refined to the technology
categories shown in Exhibit 6.2. It will be necessary to build separate base cases
IT SERVICE DESCRIPTION

Application Delivery The computing, communications, and human resources needed
to allow users to access and utilize existing computer
applications.
Application Development The human and system resources needed to create and test new
computer applications.
Customer Service The human and system resources needed to facilitate the use of
IT resources.
Professional Services The human and system resources that provide specialized
services, such as training and consulting.
E
XHIBIT 6.1 FIRST TIER OF ARCHITECTURE FOR BUILDING A BASE CASE
IT SERVICE TECHNOLOGY CATEGORY
Application Delivery Mainframe computing
Midrange computing
Distributed computing
Super computing
Output services
Wide-area data communications
Local-area data communications
Voice communications
Video communications
Premises systems support
Application Development Design
Coding and testing
Quality assurance
Database administration
Implementation services
Customer Service Help desk
Information center
Business liaison

Professional Services Training
Consulting
Data entry
E
XHIBIT 6.2 TECHNOLOGY CATEGORIES FOR BASE CASES
Halvey.book Page 323 Tuesday, August 9, 2005 8:58 AM
324 Ch. 6 Financial Considerations
for each of the technology categories that are within the scope of your outsourc-
ing investigation for two important reasons. The first is purely pragmatic: the
magnitude of effort involved in creating a base case is substantial. It needs to be
broken down into manageable components to create a practical project plan.
Second, it becomes difficult to compare vendor proposals that are not differenti-
ated along the same lines.
Within each of the technology categories described in Exhibit 6.2, there are
similar Resource Categories, as described in Exhibit 6.3. The exact nature and
relative importance of each category will vary from one technology category to
the next. A large percentage of costs in the mainframe computing category, for
example, are devoted to hardware, as shown in Exhibit 6.4. It would be a mis-
take, however, to assume that even closely related technology categories have
similar cost distributions. This is illustrated dramatically in Exhibit 6.5, which
RESOURCE CATEGORY DESCRIPTION
Hardware The physical devices that comprise processing, data storage, output,
and communications systems. Also includes the cabling used to
connect the devices.
Software The electronically coded instructions that control the activities of
the hardware devices.
Personnel The technical, operational, and administrative staff responsible for
IT services.
Facilities The physical sites in which IT hardware, software, and personnel
reside.

Outside Services Services acquired from outside firms in lieu of creating them
through in-house resources. This includes transmission facilities
from third-party carriers and disaster recovery agreements.
E
XHIBIT 6.3 RESOURCE CATEGORIES WITHIN TECHNOLOGY CATEGORIES
EXHIBIT 6.4 MAINFRAME COMPUTING COST DISTRIBUTION
Source: Gartner
Operations
14.7%
Software
13.8%
Hardware
46.3%
Occupancy
10.4%
Finance/Administration
2.7%
Technical Services
10.1%
Disaster recovery
2.0%
Halvey.book Page 324 Tuesday, August 9, 2005 8:58 AM
6.2 Base Case 325
compares the cost distributions of the mainframe (data center) computing and
client/server computing categories.
Budgetary myopia is a common mistake made in creating the base case. Each
IT organization deals with an operating budget that conforms to the accounting
norms of the company as a whole. Corporate practices and, in some cases, busi-
ness industry conventions may dictate whether a variety of cost elements are
included in the IT budget. Common examples of cost elements that vary from

one company to the next in budgetary treatment are capital expenditures, occu-
pancy costs, and personnel benefits. If these kinds of cost elements are excluded
from your base case, it will be impossible to compare your true costs to those
proposed by vendors.
Therefore, it is critical to develop a business model base case rather than a bud-
get model base case. The business model approach identifies all functional
resource category elements required to create and deliver a given IT service if the
IT organization were an independent business unit. Identification of the cost ele-
ments can be straightforward, but finding the costs may be a daunting task. For
example, all capital expenditures may be grouped into large financial pools for the
purpose of calculating corporate depreciation. It may require manual calculations
based on purchase orders to determine the equivalent depreciation for various tele-
communications devices (e.g., multiplexors and modems). Exhibits 6.6 through
6.13 provide examples of business model base cases for major IT services. Please
note that it is critical to differentiate budget expenses from corporate expenses in
order to reconcile total IT expenditures to management perceptions.
(b) FINANCIAL CONCEPTS. Each of the resource categories in the base case
models consists of several different kinds of cost elements. It is essential to
understand the characteristics of each element to ensure the creation of an
EXHIBIT 6.5 COMPARISON OF COST DISTRIBUTION OF MAINFRAME AND CLIENT/SERVER
C
OMPUTING
Source: Gartner
Hardware
48%
Other
10%
Software
14%
Support

28%
Data Center
Cost Distribution
Software
6%
Hardware
15%
LAN
2%
Support
77%
Client Center
Cost Distribution
Halvey.book Page 325 Tuesday, August 9, 2005 8:58 AM
326 Ch. 6 Financial Considerations
PERSONNEL
F
INANCE AND ADMINISTRATION
Vendor Management, System Procurement
Financial Accounting, Chargeback Administration
Quality Management
Administrative Management and Support
OPERATIONS
System Operations, Operations Support
Tape Operations
Print Operations, Fiche Operations
Production Control
Operations Management
TECHNICAL SERVICES
Operating System Support, Subsystem Support, Internal Systems Support

Performance Analysis, Capacity Planning
Storage Management
System Security, Contingency Planning
Technical Management
NONPERSONNEL
M
AINFRAME HARDWARE
Processors (CPU, channels, modems)
Disk Storage (disk drives, control units)
Tape Storage (tape drives, silos, control units)
Optical Storage
Printers (locally attached, high-speed printers)
MAINFRAME SUPPLIES
Print (paper, forms, ribbons, toner)
Tape (cartridges, reels)
Microfilm/Microfiche
MAINFRAME SOFTWARE
System (e.g., MVS, VM, CICS, IMS, FOCUS, SAS, COBOL, utilities)
Applications (e.g., accounts payable, payroll, order entry)
FACILITIES
Office Space (floor space, furniture, office equipment and supplies, phones)
Other Space (raised floor, tape library, storage)
Power (electricity, gas, UPS, batteries)
Site Management (security, janitorial, maintenance)
OUTSIDE SERVICES
Disaster Recovery Site
E
XHIBIT 6.6 MAINFRAME COMPUTER PROCESSING BASE CASE
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