Server Consolidation within Outsourcing Contracts

Guest blogger Carol Wright of TPI's Financial Analysis Services Group "blogging about the bottom line"

Carol_wright_2 Service providers are increasingly touting "server consolidation" as a sure way to cut costs in IT sourcing contracts. Providers typically offer guaranteed price decreases based on a commitment to reduce the total number of client servers. However, guaranteed decrease in price shouldn't drive hasty contract signing.

The two primary alternatives include: consolidation guarantees within a sourcing contract via contractual price reductions, and project by project consolidation efforts.

The upside of having server consolidation within a contract is the shifting of risk to the service provider. If the service provider does not meet commitments, companies still receive financial benefits via contractually guaranteed price reductions. But the following need to be considered:

Server-Software Inventory - Without an inventory that includes the physical properties of the server environment and server-specific software applications, server consolidation is unrealistic.

Reasonability - Are reduction commitments reasonable and achievable within the time frame quoted, and have other relevant activities been taken into account? 

Barriers - What barriers can prohibit the service provider from meeting commitments, and how will issues that arise be dealt with?

Unintended Costs - If commitments aren't met, additional software, real estate and capital outlays may be incurred, which need to be factored into the sensitivity analysis.

Measurement - Does the contract define server consolidation measurement against targets as well as the financial implications if the service provider exceeds or falls short of consolidation targets and deadlines?

When leaving commitments undefined, the client works with the service provider on a project plan and pays for consolidation activities on a project by project basis. The upside is that all related savings accrue to the client, contract negotiations are simpler, and there are fewer issues with tracking service provider targets and contractual obligations. However, it puts more risk on a client to manage the project, determine allocation priorities, and get funding approval for each consolidation project.

Which of these two approaches makes more sense to you and why?  If you have sourced your server operations and services, what has been your experience with server consolidation?  Have service providers been able to meet reduction targets within the time frame specified in the contract?  What kind of financial benefits did you see from consolidation compared to your business case?