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For an application management service (AMS) engagement, when the technology
and delivery capabilities of two vendors are almost at par with each other, the
key criterion for vendor selection is often based on its proposition to offer
cost savings or quantum reduction in IT budget. Service level agreements (SLAs)
and metrics like productivity gains, and service quality improvements are other
significant factors despite being commoditized.
CIOs and IT departments finalize SLAs and fix cost reduction targets as the
success of an AMS engagement continues to be measured by annual budgetary
savings. The focus on driving results through the delivery of business
functionality is relegated to secondary priority. Most often, IT departments are
oblivious of the opportunity costs incurred by the business each time there is a
disruption in its operations due to the sub-optimal implementation of software
functionalities. The IT Service Management (ITSM) tools used for incident
management are designed to measure service performance but lack the inherent
ability to record the opportunity cost associated with an incident.
Opportunity Costs
There is need to shift the focus from targeted reduction in application
spend towards avoidance of opportunity costs by proactively overcoming
inadequacies in the implementation of software functionalities that cause
business disruptions.
The following examples highlight the need to re-look at AMS engagements and
design a service model to control the opportunity costs that the business incurs
due to issues faced by users in various roles and functions.
- Deferred revenue stream due to limitations in the implementation of sales
invoicing functionality: Sales representative of a large high-tech company was
unable to generate invoices through the SAP system for one of its customer. As
per procedure, he reported the incident to the service desk seeking its
resolution. After resolving the incident, the service delivery team conducted
a root cause analysis and found that the product category and region-specific
customization to the billing functionality prevented the creation of invoices
worth $200,000 in a year. The interest foregone on account of delayed payments
and the additional effort required for accounts receivable follow-up and
recovery amounted to $10,000. This analysis reveals that the financial
implication of functionality-related incidents is substantial. Further, it
underlines the need to proactively minimize this opportunity cost.
- Rejection of inter-company invoices and subsequent payment delays to
partners: Heres another example where an AMS solution for a CPG company has
delivered savings on both frontsIT as well as business. The company serviced
its channel partners across Europe through its distribution network of mega
distribution centers (MDC) and distribution centers (DC). All shipments from
the MDCs to the DCs were settled with the holding company as inter-company
transactions.
As a business practice, the company made a commitment to the inter-company
partner at the beginning of the year to deliver all products both in the
production as well as design stage at a planned price as mentioned in the price
list. The process entailed the scrutiny of the invoices to confirm products,
quantities, price, timing, etc, prior to the settlement of payment between
various entities. A large number of invoices, amounting to 1 mn per day, were
rejected due to difference in quoted price and invoiced price.
The AMS vendor responsible for service desk and incident management function
failed to put an end to the rejection of invoices, which continued unabated for
almost six months. Being in a multi-vendor set-up, the vendor classified the
recurring incident as a problem and escalated it to Patni for the detection of
the underlying cause of the incident and its subsequent resolution and
prevention. An investigation into the core business process brought to the fore
that the price difference occurred due to the change in product cost structure
as a result of modification in product configuration either during the design
stage or production stage.
The Patni team resolved the issue by recommending an improvement in the
business process. It advised the clients product costing team to communicate
the planned price to the inter-company partner at the time of making the first
shipment of new products. Consequently, the invoiced price matched with the
planned price in all the subsequent transactions.
The business process improvement eliminated invoice rejections and annually
saved 0.5 mn on account of opportunity cost and lost business hours. It also
reduced the IT resource cost thereby saving the CPG company 100,000 in its
annual IT budget.
Outlook Ahead
A focus on opportunity cost reduction while finalizing AMS budgets provides
both the clients IT organization and the service provider a new perspective for
designing an AMS engagement strategy. A cost impact catalog that spans various
business scenarios is a logical step forward in this direction. Further, service
desk tools should be customized to incorporate the catalog and equipped with the
ability to record the opportunity cost of an incident. This will facilitate the
IT team to measure the business value added by AMS.
This AMS service design approach will drive restructuring of SLAs to reflect
the cost saved by the business and shift the focus towards business-centric
service management. The AMS service design built with this consideration can
lead to an efficient AMS operational model that can track both the IT costs and
opportunity cost to the business. However, the client and application services
provider will require considerable IT service maturity level to adopt and
stabilize this model.
Prashant Shirgur
The author is senior solutions architect, enterprise application services,
Patni
maildqindia@cybermedia.co.in
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