Sunday, December 2, 2007

Safe Driver Discounts for Technology

Automobile insurers have long seen the sense of giving drivers an incentive, in the form of safe-driver discounts, to avoid taking risks when they’re behind the wheel. In health care, more and more payers are rewarding doctors for the quality of care they deliver and not the quantity. Aligning incentives with outcomes makes good sense.

Vendors of technology should follow those examples and revise their pricing models for yearly hardware and software maintenance contracts. If they rewarded customers who adhere to best practices, they would essentially pay customers for their performance.

As a CIO of multiple companies, I have to sign off on a lot of maintenance contracts every year. These contracts have a list price, and there’s usually a discount that the manufacturer passes along to the value-added reseller (VAR). The VAR decides how much of the discount to pass along to customers. No extra consideration is given to customers who abide by the vendor's best practices for the implementation and management of its products.

But why not? Why not give technology buyers the equivalent of a safe-driver discount? If customers were given incentives to hire highly competent internal staff, follow all the vendor-recommended configurations and install all the latest upgrades, life would be better for both the vendor and the customer. The vendor would receive fewer support calls and requests for emergency priority service. The customer would get higher reliability, better performance and lower maintenance costs.

Five years ago this month, we experienced a devastating network outage that led me to change a lot of our practices. Before the outage, my only incentive to adopt best practices was fear of downtime. The cost of support was certainly not a factor. We could make hundreds of support calls and send out an SOS during numerous high-priority emergencies, and the cost would be the same as it would be with a spotless performance record. The outage led me to replace much of our infrastructure, enhance my support team and ensure that our engineering practices are world class. We now place an extremely low burden on our vendors, but our maintenance discounts for all the technology we operate today don’t reflect that.

Here’s my idea. Vendors would give each customer a yearly technology safety rating, starting at, say, 100 points. If you miss an upgrade, 10 points would be deducted. Deviate significantly from a recommended configuration and you lose another 10 points. Make a support call that’s due to your lack of appropriate IT staffing and more points are taken away.

Discounts would no longer be arbitrary. Instead, they would be a direct function of the yearly safety rating. The harder a customer worked to avoid calls for help, the less the maintenance would cost. The best customer of the year could even be rewarded with completely free maintenance.

Of course, there are potential problems. Vendors could abuse the system by defining best practices as the elimination of all competing products, or they could take away points if customers didn’t buy all the optional add-on software they recommend. But such tactics would defeat the spirit of this proposal. Any vendor that adopted them could expect a good deal of pushback from customers; hopefully, they would see that such transparently cynical ploys have no real value.

So let me publicly ask my good friends at Cisco, EMC, Dell, HP and IBM, What do you think? You'll find that my driving record is exemplary.


John Halamka said...

Here's an interesting comment I received about this post:

John - On the surface a good idea. However, the point you are missing is this:

50-70% of tech companies revenues come from maintenance fees. Relatively few revenues come from new sales. So it is unlikely that most companies will give you the deal you are proposing, unless they can figure out how to extract money some other way from you. M&E is what drives business and development, not new sales revenues.

The fact that so much revenue is dependent on maintenance streams is why some large companies will give you their whole software suite for free in exchange for a 5 year M&E lock in (remember Computer Associates?).

Most companies will go down to an 8-10% M&E rate for a 3-5 year lock in if you negotiate hard. That isn't a bad deal since remember that you are not just getting support but also upgrades w/o charge.

I would also recommend that companies always get a contract in place that limits their M&E to the price they paid for the software, not the current list price, which is what most customers who don't know what they are doing agree to, either explicitly or implicitly. When company product sales are declining, companies will often raise the list price of their products so that they can milk more M&E revenue.

And the last company I worked for actually had a clause in the contract which let THEM cancel the contract on 30 days notice, effectively negating anything you negotiated originally if they so chose (for instance if the company was acquired and got new management). I was amazed at the number of companies that left themselves exposed by signing off on a contract with this clause without question.

John Halamka said...

Here's a great response to this blog entry that was emailed to me:

-----Original Message-----
> From: Ray Todd Stevens []
> Sent: Fri 12/14/2007 2:54 PM
> To: Halamka,John D. (CAREGROUP - Chief Information Officer)
> Subject: Tech Safe driving can be the problem
> I have to disagree with you regarding your comments on tech safe drivers.
> The top half of the last colume of the article is one of the keys to the
> problem. This would very quickly become a marketing tool, and "best
> practices" would be the have only the vendor's products, and to have the
> latest greatst of those. No where would actual good practices be involved
> in this vendor defined best practices. There would be a cross marketing
> thing where vendors which didn't sell one type of product would have a
> lmited number of venders that sold that product to chose from when
> doing"best practices". Of course these venders would either cross
> exclusively "approve" each other, or have to pay for the approval. None of
> this would actually help with support.
> I find that vender defined setups are frequently the problem. Time and
> time again the problem I had was that instead of setting it up the way I
> would have liked to have and which would make sense, I followed the
> vendor requirements, which of course turned out not to work. (But usually
> did include using the most expensive option they sold ;-) ) On the other
> hand I would say that maybe a discount should apply not for best practices,
> but for best preparation.
> #1 Having the right diagnostics tools available, and people trained in their
> use. This includes things like the ability to talk on the phone next to the
> machine with the problem.
> #2 Having read the manual before calling
> #3 The vendor would have at actual usable knowledge base which you
> would be required to consult before calling. Now why do I say "actual",
> That is because I have found many knowledge bases simply are tied to
> marketing and have no reall knowledge of technical issues in them.
> Instead they either keep bringing up sales pamplets on the fanciest
> versions of the companies products, or have no knowledge at all in them,
> but then pass your contact information and search strings off to marketing
> who will insistantly call you for the next several weeks "trying to solve your
> problem.'"
> #4 were applicable, possible and reasonable have the ability for the
> vendor to call into the equipment remotely already in place. (But locked
> out until activated).
> But you can bet that marketing will override these suggestions as they will
> not sell products. They will only solve customer problems. Having
> worked for one vendor, I can tell you that solving problems with the existing
> equipment, when an additional sale "is possible" is not something that you
> are rewarded for. :-(
> --
> Ray Todd Stevens Specialists in Network and Security Consulting
> Senior Consultant Stevens Services
> Suite 21 (812) 279-9394
> 3754 Old State Rd 37 N
> Bedford, IN 47421