Health system ITO contract restructuring : A case study
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The client, a large health system, needed to restructure a large IT outsourcing contract due to significant scope changes from mergers and acquisitions. The vendor was not meeting service level agreements or pricing benchmarks. Over 12 weeks, the consulting firm worked with the client to identify key performance indicators, assess the current state, and negotiate a new agreement with the vendor. The new agreement improved application availability, added penalties for support failures, identified $20 million in savings, and committed both parties to infrastructure upgrades.
Health system ITO contract restructuring : A case study
- 1. Case Study: Restructuring a multi-year IT Outsourcing contract for a Large Health System Background The client had entered into a very large IT outsourcing contract with a global services provider with a significant offshore capability. The scope of the contract covered server, network, and end user computing. The contract was comprehensive in scope, with substantially all of IT infrastructure operations being handed over to the vendor. Due to several acquisitions and mergers, the scale and complexity of the engagement had changed dramatically. However, the performance against contract objectives was short of expectations due to a variety of reasons. Specifically, the following issues were identified in the current state: The client, a major health system, needed expert help to restructure a large outsourcing contract for improved service quality, while adjusting contract pricing to reflect significant scope changes and market benchmarks. • The size of contract had increased significantly, both on the steady state work as well as on projects • Market stakeholders believed that the quality of service has decreased significantly since the transition of the services to Vendor • the IT infrastructure, lack of discipline in change management processes, and lack of thorough root cause analysis and proactive actions. • The Service Level Agreements were not aligned with business objectives The business continued to suffer due to lack of stability in
- 2. The client needed expert advice to restructure the contract and drive operational and service quality improvements, while adjusting contract pricing to reflect industry benchmarks. Approach and Results: Over a period of 12 weeks, by working closely with the CIO and the IT leadership, we were able to identify the appropriate measures of performance that would reflect internal stakeholder needs, and developed an approach and a framework for driving joint accountability for the future state goals and objectives. Through a series of workshops and in-depth discussions, we were able to drive agreement on the right critical performance indicators and a service quality improvement framework. We approached this effort as a 3 stage process: • Assemble & align project teams • Identify key documents & data collection requirements • Conduct pre-launch meeting • Release pre-launch data request • Conduct project kickoff • Develop and refine negotiating strategy • Negotiate desired outcomes with vendor • Finalize negotiated agreement • Analyze current state (contract, financial, operational, relationship & risk) • Build consensus around sourcing objectives, scope and organizational readiness • Conduct high level market and relationship assessment • Conduct a workshop to align goals among various stakeholders • Identify and assess sourcing options • Develop high level financial cost/ benefit analysis • Create business case and discuss options (renegotiate, recompete, repatriate) Assess Prepare Negotiate As a result of structured and facilitated discussions, the parties were able to arrive at a broad agreement on a variety of issues. These included: 1) Redefining SLA's to reflect end-to- end system availability at a divisional/application level as against the earlier metric of computing availability and uptime in aggregate at the server level. A clear roadmap to achieve 99.99% availability was agreed upon with the vendor. Client level dependencies such as infrastructure upgrades, such as server/LAN refresh programs, were agreed upon, along with timelines, in order to achieve the agreed milestones for improved system availability. • There were significant perceived gaps in the vendor's technical capabilities • The execution of project work was seen to be lacking in demand management, as well as quality of deliverables • The cost base in certain areas was seen to be off market benchmarks
- 3. At the end of the renegotiation discussions, we were able to drive clarity on the revised scope and scale of work, adjust the fee structure to reflect enhanced volumes, and a commitment to infrastructure upgrades that would drive overall the performance of IT operations at the enterprise level. 1. Application availability for critical systems: 99.95% minimum, increasing to 99.99% in 6 month period 2. Support SLA's: 23 additional stretch SLA's with substantial penalties for failures 3. Improved pricing and volume discounts: Nearly 20 Million in identified savings potential Key outcomes for client: 2) A revised computation of risk pools and weightages to reflect the future state focus on specific towers, regions and metrics 3) Rebaselining of volumes and range of devices to be supported as a part of the contract 4) Adjustments to the fee structure based on resource unit (RU) measurement, revised volume discounts, and a slab-wise fee structure for project work. 5) Adjustments to the “dead band” and ARC/RRC to reflect the new agreement 6) Agreement to upgrade project demand management processes, and a slab-wise fee structure based in increasing volumes beyond agreed thresholds USA One Lincoln Center 18W140 Butterfield Road Oakbrook Terrace Suite 1500 Oak Brook, Illinois, 60181 INDIA 603/11/A, 19th Main Road, 2nd Floor, Sector 2, HSR Layout, Bangalore 560 102 (India) Email: info@damoconsulting.net | website: www.damoconsulting.net Damo Consulting Inc is a management consulting, research and advisory services firm focused on IT strategy, Global Sourcing, and Analytics. Our firm works with large enterprises and global service providers in the healthcare sector. Copyright © 2015 , All Rights ReservedDamo Consulting