An ABSERD incident – a service desk satire

The expenses application crashed just as Tina had finished entering the last line. She wasn’t duly alarmed; this had happened to her a couple of times before, but Nathan in IT was able to sort it out without her having to reenter her expenses.

She dialled his number, he answered in a couple of rings. After a brief exchange of pleasantries, she described the problem.

To her surprise, he replied, “I’m sorry Tina, I can’t help you. You will have to call the service desk.”

“The service desk?”  She asked, “What’s that?”

“We have streamlined our IT service procedures to comply with the ABSERD standard –  which stands for  Absolutely Brilliant SERvice Desks. It is an ABSERD requirement that all service calls must be routed through a centralised service desk.”  explained Nate. “The procedures and the numbers you need to call were in the email that was sent out to everyone last week.”

“Yes, I read it, but I didn’t think the ABSERD procedures applied to something like the expenses app.,” said Tina, somewhat bemused.

“I’m afraid it applies to all services that IT offers,” said Nate.

“But isn’t the service desk located elsewhere? Will they even know what the expenses app is let alone how to fix it?”

“Ummm…they’ll fix it if they can and escalate it to the next level if they can’t,” replied Nate. “The ABSERD processes are detailed in the email,” he explained again helpfully.

“You know what the problem is.  Tell me honestly: do you think they’ll be able to fix it?”

“Probably not,” admitted Nate.

“So they’ll escalate it. How long will that take?”

“The ABSERD service level agreement specifies that all non-critical issues will be responded to within   48 hours. I’m afraid the expenses app is classified as non-critical.”

“So that’s 48 hours to fix an issue that you could sort out in minutes,” stated Tina in a matter of fact tone.

“Ummm…no, it’s 48 hours to respond.  That’s the time frame in which they will fix the issue if they can or escalate it if they can’t fix it. As I mentioned, in this case they’ll probably have to escalate” clarified Nate.

“You mean they’ll take 48 hours to figure out they can’t do it. Now, that is truly absurd!”   Tina was seriously annoyed now.

“Well, the service desk deals with calls from the entire organisation. They have to prioritise them somehow and this is the fairest way to do it,” said Nate defensively. “Moreover, the service level agreement specifies 48 hours, but there’s a good chance you’ll get a response within a day,” he added in an attempt to placate her.

“And who will they escalate the call to after 48 (or 24) hours if they can’t fix it?” asked Tina exasperatedly.

“Ummm….that would be me,” said Nate sheepishly.

“I’m sorry, but I’m totally lost now. By your own admission, you’ll probably be the one to fix this problem. So why can’t you just do it for me?”

“I’d love to, Tina” said Nate, “but I can’t.  Jim will have my hide if he knows that I have bypassed the ABSERD process. I’m sorry, you’re just going to have to call or email the service desk. I can’t do anything about it”

“Why are we suddenly following this ABSERD process anyway? What’s the aim of it all?” asked Tina.

“Well, our aim is to improve the quality of our service. The ABSERD standard is a best practice for IT service providers…,” he trailed off, realising that he sounded like a commercial for ABSERDity.

“You do agree that it actually increases the service time for me. You could have fixed the issue for me in the time we’ve had this conversation but I’m going to have to wait at least 24 hours. I fail to see what has “improved” here.”

“Look, this is the new process. I’m sorry can’t do anything about it,” said Nate lamely.

“OK, I’ll log the call.” she said resignedly.

“I’m sorry, Tina. I really am.”

“It’s not your fault,” she said in a gentler tone, “but I’m probably going to miss the deadline for getting my expenses in this month.”

“Tell you what,” said Nate, as the obvious solution dawned on him, “I’ll fix the problem now… but please log the call just in case someone checks.”

“Are you sure you can do that?” asked Tina. “It would be nice to get reimbursed this month, but I do not want you to get into trouble.”

“It shouldn’t be a problem as long as you don’t tell anyone about it…I wouldn’t want to make it known that I bypass the ABSERD procedures as a matter of course.”

“My lips are sealed,” said Tina. “Thanks Nate, I really appreciate your help with this.”

“No worries Tina. I’ll call you when it’s done,” he said as he ended the call.

Dark clouds, silver linings: a transaction cost perspective on the outsourcing of information systems

Introduction

Some years ago, I wrote a post applying ideas of transaction cost economics to the question of outsourcing IT development work.  In that post I argued that evaluating costs on the basis of vendor quotes alone is highly misleading. One has to also factor in transaction costs – i.e. costs relating to things such as search, bargaining and contract enforcement.

In the present post I discuss transaction cost theory as it applies to the question of whether or not organisations should outsource their enterprise systems (such as ERP and CRM applications) to Software as a Service (SaaS) vendor. With the increasing number of offerings on the market, this issue is one that is high on the agenda of IT decision makers.

To be sure, there are many well-known (and massively hyped!) benefits of cloud-based solutions. To name just one: organisations that take the SaaS route do not have to worry about maintenance, upgrades etc. as these are handled by the vendor. As we shall see, however, when it comes to costs, things are not so clear.

Setting the context

Today’s IT landscape is considerably more complex than that of a couple of decades ago. Improvements in infrastructural technology now offer the IT decision maker choices that were simply not available then.  One of the basic choices a decision maker is faced when implementing a new enterprise system is whether to develop (or customize), host and support it in-house or opt for a cloud-based offering. Most often decisions on these matters are made on the basis of vendor-quoted costs alone. A typical discussion between a supporter and skeptic of outsourcing may go as follows:

Supporter: We should outsource our CRM system because we will save costs. We can save X million dollars on licensing and hardware…and then there are potential savings on personnel costs in the longer term.

Skeptic: Yes, but we lose flexibility to modify the application to suit our needs.

Supporter:  Flexibility is overrated. We have done a gap-fit analysis and have found that most of core business needs can be satisfied by the three shortlisted cloud offerings. We are not a complex business:  we call on customers, sell them our product and then follow-up from time to time to see how they are going and whether there are potential opportunities to sell them upgrades. It’s pretty much what everyone else in the business does.

Skeptic: What about vendor lock-in?

Supporter: There is no lock in we pay as we go; per user per month.

….and so the conversation goes. The supporter seems to have an answer for every question so the skeptic may eventually concede. However, the latter may still be left with a vague sense of unease that something’s been overlooked, and indeed something has…which brings us to the next topic.

Transaction costs

A firm has two choices for any economic activity: performing the activity in-house or going to market. In either case, the cost of the activity can be decomposed into:

1. Production costs, which are direct (easily quantifiable) costs of producing the good or service
2. Transaction costs, which are other (indirect) costs incurred in performing the economic activity.

Production costs include things such as per user cost etc. These are typically quoted upfront and are easy to contractualise (i.e. put into a contract).  Things are more complicated when it comes to transactions costs. To see this, let’s take a quick look at the different types of transaction costs:

1. Search /selection costs: These are the costs associated with searching for and shortlisting vendors.
2. Bargaining costs: These are costs associated with negotiations for a mutually acceptable contract.
3. Maintenance costs: These are expected costs (i.e. those that were foreseen when the contract drawn up) associated with ongoing support, enhancements or upgrades.
4. Costs of enforcement and change: These are costs associated with enforcing the terms of the contract and those associated with change.

These costs are typically hard to estimate upfront, and nearly impossible to contractualise. Moreover, in most cases, they are largely borne by the client.

Dark clouds

The difficulties associated with contractualising transaction costs arise from the following:

1. Unexpected events: Unforeseen and unforeseeable changes in the customer / vendor organisations or in the business environment may entail major changes in the application functionality or even the outsourcing arrangement.
2. Bounded rationality:  Business environments are complex and it is impossible for the human mind to anticipate everything that can possibly occur. As a consequence,  every contract is necessarily incomplete; there is bound to be something that is overlooked. It is impossible contractualise every eventuality.
3. Strategic / opportunistic behaviour: the vendor or customer may deliberately withold certain information from the other party  at the outset in order to secure the contract at a favourable rate. Typical vendor behaviour may include not revealing certain limitations of the software on the other hand, the customer may attempt to include unfair penalty clauses into the contract or squeeze the vendor on margins.

Now before I’m accused of being unduly alarmist I should mention that certain kinds of enterprise systems are not subject to the above difficulties, or at least not significantly.  Typically these are infrastructural services such as servers, operating systems, databases and even simple, context-independent applications such as email.  These can be outsourced successfully without any problems because the services to be provided can be specified accurately upfront and thus contractualised unambiguously.

However, for enterprise applications such as ERP and CRM the situation is different because these systems are more or less unique to a given organisation – in other words, they are context-dependent.  Their uniqueness renders them vulnerable to the points mentioned above because it is impossible to foresee all possibilities. As a consequence it is inevitable that any outsourcing deal involving such systems will eventually be affected by one or more of the above uncertainties.

Silver linings

None of the above points is new: both vendors and customers are at least somewhat aware that application outsourcing deals have many unknowns. Consequently, both parties try to minimise their exposure to uncertainty. Unfortunately,  they usually go about this in exactly the wrong way:  they attempt to build safety for themselves at the cost of the other party. They do this by attempting to contractualise all possible things that can go wrong from their point of view. This is impossible because the future cannot be predicted.  Contracts, however detailed, will necessarily be incomplete.

The way out is simple. As Oliver Williamson, winner of the 2009 Economics Nobel Prize, tells us:

…important to the transaction-cost economics enterprise is the assumption that contracts, albeit incomplete, are interpreted in a farsighted manner, according to which economic actors look ahead, perceive potential hazards and embed transactions in governance structures that have hazard-mitigating purpose and effect. Also, most of the governance action works through private ordering with courts being reserved for purposes of ultimate appeal.

As he tells us, contracts need to be interpreted in a farsighted manner and governance action should work through private ordering (directly between the customer and vendor). Essentially, the success of an outsourcing deal is to a large extent the joint responsibility of the customer and vendor. Above all, it calls for a relationship based on old-fashioned notion of trust.

Interestingly, Elinor Ostrom, who jointly won the 2009 Economics Nobel with Williamson, had much to say about informal contracts, private ordering and trust.  Her extensive studies on collectives lead her to conclude that successful collective endeavours have the following two elements in common:

1. High levels of face-to-face communication
2. Innovative governance structures that are designed and enforced by the participants rather than external authorities.

The relevance of these to an outsourcing arrangement is clear: face to face communication builds trust, and innovative internal governance structures that are enforceable without legal recourse will discourage opportunistic behaviour from both parties. Although the latter may sound a bit utopian there are proven ways to set up such governance structures (see this paper for an example).

Conclusion

In this post I have argued that a proper analysis of SaaS deals must include transaction costs.  Although these are difficult to quantify, a consideration of the different categories of transaction costs will at least lead to a more realistic appraisal of such arrangements.  It is my belief that many outsourcing deals go sour because transaction costs are overlooked.  Given that it is impossible to foresee the future, the best course of action is to develop a business relationship that is based on trust.

To sum up:  most important factor in enterprise application outsourcing is not cost, but trust – an ineffable element that can neither be quantified nor contractualised.