Chris Dallar: Your rates are too high!!!

Posted on May 30th, 2014 By Chris Dallar

It happens every year, during July.  I’ll be sitting in my chair going through the mail and I will come across the first electric bill of the summer.  The total bill will have tripled from normal levels, and although it happens every year, I am shocked and appalled.  Central air conditioning, the motor for the pool filter and the electric powered pool heater are now working in full force and the electrical meter at the house is spinning like a top.

Electric MeterMy first reaction?  I turn up the thermostat in the house, run outside to adjust the timer on the pool filter and lower the temperature of the pool water.  The pool temperature setting allows us to play a game all summer where I turn the temperature down and then someone, who never identifies themselves, turns the temperature back up.  For the next week, I’ll growl at the kids about leaving every light on in the house and question if “they have stock in the electric company?”  They roll their eyes and know this too shall pass.

What is not part of this annual ritual is me calling the electric utility and telling them that their rates are too high.  I have a choice now, in this deregulated industry, to choose who supplies my power and my local company has to allow that power over their transmission system and into my house.  I’ve run the numbers and the differences in these unit rates would not make a large impact against my total spend.  I know, like many of you do, that managing my usage is the best way to reduce my electric bill.   This equation is true for virtually any commodity.  Set the price and manage the quantity.

Many clients who have outsourced all or part of their IT environment have had the equivalent of my July power bill shock.  They open their bill and are shocked at the total.  And then……they call their IT provider to tell them that their rates are too high.  The IT provider then explains the P times Q math to the client to show that the total bill is simply a function of their usage.  This normally leads to “How could you let me do this?!” from the client.  This is like blaming the bartender for being “over served”.

Most clients spend an inordinate amount of time, energy and money choosing the IT provider(s) they will outsource work to.  They spend months working and grinding to get the very best unit price available in the marketplace from a reputable provider.  They then ensure that the unit prices for various services will remain among the best in the marketplace for multiple years by including very specific contract terms and conditions which protects these unit prices.  So much energy goes into “setting the price” and guaranteeing those unit prices for the life of the agreement.  Unfortunately, this is where most clients stop.

It’s great to have a world-class, competitive set of unit prices but the single largest lever a client has to reduce their IT spend in an outsourced environment is to manage their IT consumption.  Imagine if the same level of time, energy and money was spent “managing the quantity”.  Not only are clients not managing their consumption, but the change to an outsourced model makes it easier for their enterprise to consume IT resources which leads to the client spending more than they imagined or budgeted.  This is not a dark plot by the service providers but it is an outsourcing dynamic and commodity procurement issue that clients need to understand and gain control of.

You probably have company-wide initiatives, including signs and posters, to manage your power consumption and create an attitude of conservation.  Why aren’t you doing the same for IT?  Why aren’t you using the largest lever you have to lower your IT spending?  You might want to answer a few of these questions before your CFO asks.

Next time I’ll discuss some ideas around IT conservation.

Chris Dallar is the president of the Logan Advisory Group. Follow Chris here or at LinkedIn by clicking the icon below.