Working Knowledge

Lease vs. Buy: How to Determine if the As-A-Service Model is the Right IT Procurement Solution for an Agency

Topics in this Working Knowledge :

Enterprise Agreements

What You Need to Know:

  • The age-old lease-versus-buy argument in the federal IT space has been reignited by “As-A-Service (XaaS),” a subscription-based lease option that has matured and grown more competitive in recent years.
  • XaaS is changing the game by providing budget consistency, unprecedented scalability (up or down), and reduced administrative complexity of commoditized IT services, allowing agencies to focus limited resources on mission-critical activities.
  • However, drawbacks to XaaS include paying a significant premium, dealing with vendor lock-in, re-training staff on strategic vendor management principles, and re-allocating affected staff.
  • Investing upfront effort in understanding priorities, requirements, and necessary skills for internal staff will help determine whether XaaS is the right model for an agency.

 

Evolution of the “As-A-Service” Offering

Historically, federal IT offices had two models for acquiring software or hardware: the Ownership Model and the Leasing Model. Agencies that procure their own assets and directly manage the associated services with their own resources follow the Ownership Model. This model is ideal for risk-averse agencies that want to self-manage services, control all assets, and can accept long technical refresh cycles. Most federal agencies still employ this model for the majority of their services, such as (but not limited to) email, end user computing (PCs), hosting, and help desk.

 

The Leasing Model is similar to the Ownership Model in that the management of the service is performed by the agency, and is ideal for agencies that want to self-manage their services. In contrast to the Ownership Model, though, the equipment in the Leasing Model is leased to the federal government from a third-party vendor for a limited period of time. This model is thus better suited for agencies that need to replace their equipment faster and want consistent year-over-year budget consistency.

 

A third model, one that is disrupting the federal IT space, is known as As-A-Service, or XaaS[1].  This model utilizes third party vendors to provide cradle-to-grave services for specific IT functions, such as email, network, and PCs. XaaS is effectively a subscription-based leasing option, but the agency neither owns any assets nor is directly responsible for providing the service. They simply pay a transactional or annualized rate to a vendor and the vendor, in turn, is fully responsible for managing and delivering the service while taking care of acquisition, set-up, training, maintenance, and disposal of all hardware and software.

Benefits of As-A-Service

Until recently, the outsourcing wave that hit the private sector in the late 1990s struggled to penetrate the federal market. Federal skepticism towards outsourcing focused on how the loss of asset control would affect both cybersecurity and job security. But recent sequestration and belt-tightening forced federal CIOs to consider alternatives that could maintain or improve IT service levels without overextending the organization’s capabilities. Enter the As-A-Service option, perfectly suited for delivering desired outcomes for commoditized IT services while providing numerous benefits, such as:

  • Consistent cost outlays – XaaS allows CIOs to smooth out their annual budget allocations. No longer do they have to deal with budget spikes required to procure large amounts of equipment each time their hardware reaches the end of its lifecycle.
  • No management of assets – The complexity of asset and inventory management is eliminated as the vendor handles all aspects of equipment acquisition, maintenance, and upgrades.
  • Unprecedented scalability – Agencies can scale up or down as necessary depending on needs, a capability that is much more difficult to execute when services are managed in-house.
  • Re-allocation of resources – Resources formerly tied to internally managing a service are freed up to focus on more mission-critical activities.
  • Reduction in procurement complexity – Administrative staff spends less time focused on IT procurement buys.
  • Consistent refresh cycles – Agencies often struggle with maintaining refresh cycles that are in line with technological advancements, but with the burden of delivery now switched to the vendor in an XaaS model, refresh cycles are consistent and timely.

 

Drawbacks

As great as XaaS sounds, those that view the XaaS offering as a panacea should be warned of the following realities:

  • It’s More Expensive – A hefty vendor premium is associated with the service, usually anywhere from 20-75 percent of what it would cost to efficiently run a service under the Ownership Model.
  • Lock-In Is Real– Once agencies outsource a service to a third party vendor, that vendor is effectively locked in. Even if contracting shops incorporate aggressive service and operating level agreements, the cost of switching vendors mid-contract is usually so disruptive to the organization that many agencies choose to remain with underperforming service providers.
  • Vendor Management Skills Are Underdeveloped – A new skill set, not native to traditional federal acquisition management, is Strategic Vendor Management (SVM). Unlike traditional post-award contract management, SVM establishes a continuous improvement process with its vendors in order to increase their value delivery. Executed properly, it is a joint activity that should be shared between IT, finance and acquisition experts. SVM is a skill that needs to be quickly learned to deal with outsourced vendors.
  • Tough Staffing Decisions Are Required – Many federal organizations find it challenging to reduce staff or infrastructure quickly. However, if agencies do not downsize or re-allocate their support staff to accommodate the services that the IT vendor provides, the agency will end up double-paying for these services.

 

How to Assess the Best Option for an Agency

Each agency has its own unique needs and requirements that nuances any “lease vs. buy” decision. An upfront investment in understanding an agency’s requirements will go a long way in determining the ideal solution. As business cases are developed, each agency should consider the following approach:

  1. Determine Organization Requirements – Like any traditional IT procurement, agencies should invest effort to understand their requirements such as service levels, refresh rates, scalability, security, etc.
  2. Understand Agency Tradeoffs – Every agency wants to obtain best-in-class service levels for the lowest cost in the most secure environment. But it is simply unrealistic. Agencies must prioritize what they value the most, whether it is cost savings, service level improvements, scalability, asset control, job preservation, or security. Understanding which levers are most important will help filter the solutions best suited for each organization.
  3. Assess Administrative Capabilities – Agencies must determine if their contracting shop has adequate SVM skills. If not, the XaaS option becomes much more complex. Agencies must factor into their business case the appropriate training and investment to improve vendor management capabilities.
  4. Determine Ability to Re-allocate Resources – Agencies must understand how easy it is to re-allocate staff whose jobs will be outsourced in an XaaS environment. Failure to account for these situations and involve the right parties upfront can cause difficult political battles and leave a business case in shambles.

 

The Final Word

The introduction and adoption of XaaS into the federal space provides agencies another viable procurement option for IT goods and services. However, agencies should exercise caution before jumping on the XaaS bandwagon. Failing to fully understand agency requirements, skill levels, and the political climate may lead to costly mistakes, such as getting locked in to an expensive multi-year contract with an underperforming vendor or double-paying for a service. Upfront effort to prioritize requirements, decision drivers, and skill sets will help agencies determine if XaaS is the right model for their needs.

Read more software license management tips and strategies for federal IT managers.