Shopping IT Service Contracts

by Karl Tatgenhorst on January 27, 2015

Wow, my last post was in 2012. I hope to make more frequent entries going forward.

The landscape of IT contracts has seen a lot of changes in the nearly two decades that I have been involved with technology. The contracts of yesteryear were basically a form of retainer with hours being prepaid and overages being charged. The key benefit to the consumer was that they had first dibs on the resource over those who lacked a contract while the providers had numerous benefits. Part of this situation stemmed from IT still being “new” in the minds of operations and finance folks, nothing was split up and metrics were few and far between.

Currently, we look at IT through the lens of “services” with standards like ITIL giving us better clarity and granularity. Now instead of “all the users in the clinic use the computer” we are able to say “Admin staff utilizes the file server, billing system and the accounting package from 9-5 Mon thru Friday.” “Clinical staff accesses the EMR 24-7 6 days a week and occasionally needs the file server.”. These types of distinctions allow us to wrap contracts around the services we need with the hours we need. Understanding your environment from a high level like that is the very first step you need in fleshing out a good contract.

Additionally, you need to remember that the core computing platform sits under all those services and so you must be accommodating with this specific contract or you could end up with a covered service dow due to a core computing issue in a non-covered time.

When shopping contracts, you must keep in mind the benefits that you need as well as the benefit the provider gets. Often times people over negotiate and put the provider into a position where they are no longer incentivized to be more efficient.

Consumer Benefits
A known service is covered with an agreed upon service level with pricing based on expected range of hours for maintenance and times of operation. This allows the proper forecasting of IT costs and good forecasting is conducive to budgeting for project work etc… The provider will have hedged their expenses by considerably more than “just margin” in the beginning, but taking their lead on pricing will allow them room to make improvements aimed at increased reliability. Many providers will have a “roadmap to reduced costs” where certain improvements (which will be additional in terms of project cost) will actually decrease the monthly spend due to known improvements in reliability.

Provider Benefits
The provider at this point is better able to forecast utilization of their resources and has a recurring revenue stream to cover costs. At this point, it should be clear why the provider is interested in increasing the availability and reliability of your systems. Projects that are aimed at standardizing consumers on a chosen platform can greatly increase the providers efficiency and give them greater flexibility in terms of pricing.

As you consider what terms to get in your contract, here are points to consider:

  • Do you run multiple shifts?
    Many people shopping for contracts will search for 24-7 because “The owner works off hours sometimes”. If a $1,500 per month contract becomes $2,500 per month due to 24-7 and you use the off hours twice in a year, that comes up to $6,000 per incident. Chances are you could have gotten the $1,500 per month rate with a locked in rate for a small number of hours to be consumed on demand. Buy what you need on the contract, don’t over purchase.
  • Are their multiple service stacks?
    The example in the body showed that the consumer had administrative staff with services they consumed and clinical staff with their own services and minimum overlap. The clinical staff would likely have more stringent needs, cover them appropriately and separate out the other stacks. This will give you the most efficient spend.
  • What are your off hours needs?
    As above, be diligent in forecasting these and avoid over estimating.
  • What is the cost of a day of downtime?
    If your business would only lose $800 a day due to a complete computer outage, don’t buy a $4,000 per month contract. Don’t be miserly, but at the same time be prudent.
  • What are the terms for sever-ability of the contract?
    Make sure the expected service level is clearly defined and their is an exit strategy clearly documented for poor performance. At the same time, the provider will likely want assurances that the terms will be met if all conditions are met by them.

Above all, try to keep a friendly atmosphere with your provider. This is not an opportunity for him to “rope you in” nor is it you “fleecing him” this should be a mutually beneficial arrangement which aims to improve conditions for both businesses!

About the author

Karl Tatgenhorst wrote 31 articles on this blog.

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