PROJ410 Case Study 1

BPO and Cloud Computing PROJ410 Case Study 1

Contracts and Procurement
PROJ410 Case Study 1
1. Executive Summary
Smith Information Services Inc! is considering the replacement of the company"s data
center #y an outside service! $he CIO of the company is investigating the possi#ility of a
#usiness process outsourcing pro%ect that &ould move the data center to the cloud! $he
data center has gro&n rapidly and the cost associated &ith its gro&th is mounting up
every year and the cost of doing #usiness might get out of control! 'long &ith the rising
hard&are and soft&are costs the num#er of employees needed to run this data center has
gro&n considera#ly! Bo# Smith is loo(ing for possi#le &ays of outsourcing to (eep &ith
the organi)ation need of data gro&th and also ma(ing sure that cost is &ithin control and
&ithin accepta#le limit! $he CIO of the company has #een evaluating three different
options and is in the process of information gathering to understand the pros and cons of
each alternative! $here are many options from &hich to choose including* a local data
center a &ell+(no&n data center and a data center that is located overseas! ,ach of these
solutions has pros and cons and one #ig issue is the security of the data! Some of the
other issues include*
+ Service+level agreements
+ -R issues related &ith local and remote staff mem#ers
+ Other issues such as informing or not informing the customer that Smith.s
Information Services &ill #e outsourcing the data some&here!
Clouds can #e thought of as clusters of services that are not dependent on the location to
provide processing storage and/or a com#ination of these offerings! 0oving the
operation of data centers to an outsourced vendor or partner is 1uite attractive to
companies and a considera#le savings of the overhead costs can #e achieved!
Outsourcing of data center and data processing activities to third+party organi)ations can
improve efficiency reduce employee &ages and personnel costs and improve services to
the company! 'n institution may #e e2posed to additional ris(s at the same time due to
PROJ410 Case Study 1
reduced operational control over outsourced activities! 3irect and indirect costs must #e
considered #y managers in ma(ing such decisions!
2. Three different alternatives and evaluation of these alternatives
2.1. Local data center
-aving the data center close to customer is important factor in meeting customers" needs
and therefore off+site/local data centers are located in the same country as the customer!
By esta#lishing local data centers our company can e2pand and improve the offsite
model! $hese local centers &ill allo& close interaction &ith the customer and 1uic(
response to a service re1uest #eing in the same geographic location and time )one as the
customer! 4or(force may 1uic(ly move #ac( and forth #et&een the on+site team and the
local team! $o compete more effectively &ith local service providers our company can
recruit locally hired managers mar(eters and possi#le technical associates in local
centers!
Service-level agreements + Service+level agreements are critical in the outsourcing
#usiness! $he client company and the outsourcer must (no& &hat to e2pect from each
other! $he 1uality of the service+level agreements determines the 1uality of the
relationship #et&een the client company and the outsourcer! ' lot can happen during the
life cycle of a data center services contract as people are reassigned to other pro%ects
leave the company or get promoted! Our company &ould need to (no& &hose
authori)ation is re1uired to fi2 escalations in data centre hosting5 4ill there #e 64 #y 7
services from the outsourcer.s employees5
Security of the data + Cloud computing in particular has lot of concerns a#out security!
' remote service provider could #e transferring data over pu#lic data infrastructure
su#%ecting the company to data transfer ris(s! 8irtuali)ation poses ris(s &ith data from
different customers hosted on the same server! 'lthough logical #arriers may #e in place
it.s easy enough to reach the conclusion that those #arriers are not as strong as physical
PROJ410 Case Study 1
#arriers9particularly if a motivated hac(er or other malicious party &ishes to cause you
harm! :Clar( 6016;!
Timeline < $ime )one &ould #e the most convenient in going for a local data center
service as the vendor &ould #e local and our company can closely interact &ith the
people in the vendor.s organi)ation! Because of #eing in the same time )one the issues
and escalations handling/resolution time can #e considera#ly reduced!
Nos. of Vendors < In this case if the outsourcing vendor is 1uite &ell (no&n it &ould
ma(e sense to go for a single organi)ation! $his &ill also ma(e sure that all of the data
needs &ould #e fulfilled from one cloud computing infrastructure and the company
doesn.t need to depend on t&o cloud hosting to fulfill its multi+functional data needs in
case of multiple vendor cloud hosting! $his &ill also ensure the seamless integration of
data #et&een the vendor.s and our company.s systems!
2.2. Well-no!n data center

If our company opts for the &ell+(no&n data centers &e may have dedicated servers
assigned %ust for our company primarily #ecause of having a good relationship &ith the
vendor.s organi)ation! 3edicated servers are dedicated to %ust company! -aving dedicated
servers gives full control to our company over the data and computer systems! $he
hard&are for dedicated servers is o&ned #y the hosting provider and thus can reduce
overhead costs and increase our company.s profit! It may #e very advantageous for our
company to have this (ind of data center as it &ill have the highest degree of protection
against unauthori)ed access or any (ind of intrusion! $his &ill also ma(e sure that our
company.s hosted data computers/system &ould get active fire protection system and
round+the+cloc( net&or( monitoring! 3ata security from a &ell (no&n data center
provider is al&ays #etter compared to other types of 3ata center service providers! 4ell
(no&n 3ata center service providers &ill provide all the usual security measures*
physical site security mal&are protection data encryption authenticated access and
employee #ac(ground chec(s! In the case of &ell (no&n data center the outsourcing
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provider can help the company reengineer access rules to tighten security or to react to
regulatory changes! =ormally the outsourcing providers have good contractual
o#ligations to their clients and their control procedures are &ell documented and
enforced!
Timeline < $ime )one &ould depend on &hether the vendor is #ased in our country or
outside >S! In case of &ell (no&n data center vendor it may &or( out for our company
even if the vendor is out of >S! -aving a good relationship &ith the vendor can
compensate for the fact that our company and the vendor.s organi)ation are #ased in t&o
different time )ones!
Nos. of Vendors " =os! of vendors again &ould depend upon &hether ho& many such
cloud data center services providers are in good relation &ith our company!
2.#. $ata center located overseas
Organi)ations that outsource data center services overseas run a ris( of getting poor
1uality &or(! Offshore data center outsourcing sites may have limited technological
capa#ilities &hich leads to high+1uality service #eing compromised! Outsourcing
overseas involves hidden costs such as travel e2penses infrastructure to manage
operations! >nderstanding the technical language and #est practices of an organi)ation
help to create strong &or(ing relationships! Our company &ould need to evaluate and as(
various 1uestions #efore outsourcing offshore such as*
+ $o o#tain ma2imum efficiency data related to &hich all pro%ects/processes should #e
moved offshore5
+ -o& does one effectively e2change (no&ledge &ith the offshore data center5
+ $hroughout the transition ho& does one maintain #usiness continuity and &hat are the
ta2 and legal re1uirements5
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+ 4hat talents and s(ills &ill the employees need and &hat is the #est location for our
data infrastructure needs5
3ata privacy is increasingly #ecoming a glo#al concern! $here is a common practice that
&hen t&o companies enter into a contract and each company is from a different country
&e &ould need to stipulate in the contract &hich legal system governs the contract! $he
challenge #ecomes &hether the other country &ill recogni)e or enforce such a clause!
Timeline < $ime )one &ould #e an issue in this case as the vendor &ould #e #ased
outside >S! $his &ill lead to a very narro& interface #et&een our employees and the
offshore overseas vendor.s employees! $his may re1uire fre1uent travel on the part of our
employees &hich &ill add to the cost of contract and should #e evaluated &hile
considering different options!
Nos. of Vendors " =os! of vendors again &ould depend upon &hether the overseas
vendor has sufficient and state of the art infrastructure to meet our data needs and provide
data services 64 #y 7 in a year!
#. %ontract Ty&es'
3ata Center Outsourcing contracts can #e of five types
+ ?i2ed pricing
+ $ransactional pricing
+ 'ctivity+#ased pricing
+ Cost+plus pricing
+ @ain+sharing contract
$o ensure that the ultimate outsourcing contract meets ones needs our company should
e2amine the pros and cons of each pricing model!
PROJ410 Case Study 1
?i2ed pricing < ?i2ed pricing contract &ill have the price fi2ed for the duration of the
contract! $he performance of the contract &ould #e conditional upon meeting the targeted
performance levels in SA' contracts! $he data center provider &ill have the primary
responsi#ility to get the right data re1uirements understanding the data categories #y
security data availa#ility and data security in the case of the fi2ed+price model! $hus our
company &ould #e insulated from ris(s in the fi2ed price model! $he service provider can
#ecome a #etter partner in the case of the fi2ed+price model #ecause it is in the provider"s
#est interest to provide a good service to our company!
$ransactional Pricing 0odel < In the $ransactional pricing model our company &ould
pay outsourcing vendors a flat fee per unit of &or( and the unit of &or( may #e defined
as a customer complaint 3ata issues resolved @B of data processed etc! $he advantages
of this model consist of clearly defined terms &ith little room for misinterpretation!
Pricing is easy to understand #ecause of the predicta#le volumes! $he disadvantage is that
vendors may overestimate their unit prices!
'ctivity+Based Pricing 0odel + In this type of contract to cover the outsourcing vendor"s
fi2ed costs including rent e1uipment telecommunications connectivity and overhead
cost our company &ould pay a flat fee! $o cover varia#le costs such as employee.s
&ages e1uipment maintenance cost daily operational cost our company &ould pay a
varia#le fee! Some of the advantages of this type of pricing are that the e2penses incurred
against the services are reflected more accurately!
Cost+Plus Pricing 0odel + If the nature of the contractual assignment is changing then
cost+plus pricing is particularly effective! Since our organi)ations are undergoing rapid
changes &e may have re1uirements changing 1uite often! $o (eep cost under control
service providers are guaranteed a profit and procedures are put in place! $he demerits of
this model are that it could encourage the vendor to increase or sho& more costs! So
sometimes the cost+plus is not considered a via#le long+term pricing model!
@ain+Sharing 0odel + 'nother pricing type is the gain+sharing model! $his form of
incentive for continuous improvement is advisa#le regardless of the pricing structure and
in ne& relationships &here the learning curve is the highest gain sharing &or(s the #est!
PROJ410 Case Study 1
It is advantageous #ecause the vendor #enefits if the client #enefits! $he disadvantage is
that there is a lot of emphasis on value measurement #ecause companies have to develop
metrics to carefully monitor value #eing created!
(. Evaluation %riteria
Service level agreements is one of the most effective &ay to measure the performance of
the data service providers so #oth the parties" o#ligations in terms of estimated &or(loads
to performance measures should #e clearly mentioned and agreed upon! In the
outsourcing contracting process the follo&ing areas should #e evaluated*
+ Ris( assessment and 3ata Ris(s
+ Service provider location and access of information
+ 3ata 'vaila#ility and 3ata 8olume
+ 3ata transfer speed and data access speed
+ 'udit
+ Contingency plans
+ Oversight and compliance
In terms of performance &e &ould need to find out if the service provider has
consistently performed good data services on similar pro%ects! $he &or( 1uality data
protection and Infrastructure security issues should #e ascertained through proper
customer references! In such cases of outsourcing to e2ternal vendors the ris( of data
#reach or theft is much higher #ecause our company &ould have far less a#ility to
monitor and control processes and resources for handling of confidential information! By
retaining sensitive data &ithin our organi)ation"s o&n servers and providing limited
access to the e2ternal/outsourcing vendor the ris(s are some&hat minimi)ed though not
completely eliminated! ?or handling confidential information the service provider needs
to have sufficient procedures and technical resources li(e fire&alls physical or electronic
security etc! Service Aevel 'greements :SA'.s; relia#ility and confidence in security are
the largest factors in the decision ma(ing process! In case of ris( management #efore
entering into an outsourcing arrangement our company should assess the (ey ris(s that
PROJ410 Case Study 1
may arise and options for controlling these ris(s! 4hile assessing ris( some of the
factors that should #e considered include the criticality of the function to the institution
the nature of activities to #e performed #y the service provider the availa#ility of
particular ris(s and the cost and time re1uired to s&itch service providers should
pro#lems arise!
)ricing of the contract " Pricing should loo( into various parts of the contract
re1uirement such as*
+ 3ata 8olume and 3ata $ransfer speed 3ata Bac(up
+ 0onthly $raffic =et&or( >ptime
+ 3is( space
+ ?ire&all Protection
+ Customer Support 0anagement
+ 3ata $ransaction Cost 3ata 'vaila#ility and performance
Pricing &ill depend upon the type of the contract that &e choose and this has #een
evaluated in the contract types section!
*igh availa+ility + 'vaila#ility refers to the a#ility of a data and system to access the
system #y the client! Services should #e availa#le all the time along &ith some
planned/unplanned do&ntime according to SA'! Services should #e formali)ed in terms
of service availa#ility o#%ectives and re1uirements! Systems should #e planned and
designed &ith the goal of achieving the lo&est possi#le amount of planned and unplanned
do&ntime! 0anagement of virtual resources &ithin data center environment #ecomes a
critical mission! $he trac( record of the service provider is one of the ma%or
considerations that should #e loo(ed into #y the company!
Technological ca&a+ilities - 4hen considering these capa#ilities &e need to evaluate
and as( follo&ing 1uestions* -o& is the infrastructure of the company5 're they
investing in infrastructure5 By e2amining the company &ith these issues &e &ould have
a good idea &hether ris(s &orsen #y outsourcing there!
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Ease of travel and ,overnment considerations " It is important to evaluate the travel
cost especially in the case of overseas outsourcing vendor as to ho& much travel cost
&ould #e re1uired to #e #orne #y our company on a yearly #asis! 'lso &e &ould need to
ma(e sure that traveling to and from that country isn.t difficult! 4e need to loo( at
specific government considerations! If the government in the outsourcer.s country is
fundamentally different from that of the >!S! all these factors could affect companies
adversely!
-inancial Status of the .utsource vendor + $he need and availa#ility of a specific
hard&are and soft&are is re1uired for hosting and running of the application! Performing
the infrastructure feasi#ility involves determining the availa#ility of infrastructural
resources in sufficient 1uantity so that the pro%ected demands of the application can #e
met! In terms of financial sta#ility employee mo#ility intellectual property protection
and performance on pro%ects due diligence must #e done on potential service providers!
$he financial status should #e evaluated and the service provider"s financial condition
assessed along &ith the possi#le ris( that #usiness operations may cease!
$isaster recovery + If the service provider suffers some disaster even if it.s not the
provider.s fault then recovery may re1uire attention to numerous customers! Our
company &ould need to evaluate on a num#er of factors depending on ho& the provider
operates e2isting agreements and so on! :Clar( 6016;!
/. 0ecommendation'
$he data center at Smith.s Information Services has gro&n very rapidly! $he gro&th
potential for the organi)ation is very positive &hich means that more data &ill #e stored
as our data re1uirements gro& every year! Since the data need currently is changing and
&e are not sure of the data volume gro&th in the ne2t B years it may ma(e more sense to
go for cost+plus pricing model! Some of the advantages of this pricing structure are that
in the case of unpredicta#le volumes/#usiness levels the vendor is protected from losses
and our company &ould also monitor to ma(e sure that cost is &ithin the accepta#le
#udgeted limit and this &ill help us to plan our gro&th and data cost properly ne2t year!
PROJ410 Case Study 1
0eferences'
Clar(! J! :6016;! Ris(s of Outsourcing Cour 3ata Center! $he 3ataCenter Journal!
Retrieved on dated 6Dth Jan 601E from http*//&&&!datacenter%ournal!com/dc%+
maga)ine/ris(s+of+outsourcing+your+data+center/
Contractor ?!J! Fumar 8! Fundu S!F! Pedersen $! :6011;! @lo#al Outsourcing and
Off shoring* 'n Integrated 'pproach to $heory and Corporate Strategy! Cam#ridge
>niversity Press!
Sparro& ,! :600B;! ' @uide to @lo#al Sourcing* Offshore Outsourcing and other @lo#al
3elivery 0ethods! BCS!