MIP is the world's only software company to deliver solutions across the financial service verticals. Our systems are diversified to accommodate the specialised financial administration needs of medical aids; employee benefits; life insurance; treasury; lending; collective investments; wealth management and short-term maintenance and warranty.
Also unique to MIP is our billing model. There is no upfront capital outlay for MIP's financial administration systems, and no hidden billing. Instead, we share our clients risk while helping the client to grow their business. By creating true partnerships with our clients, their success is in our best interest, which is why some companies have been with MIP for over 18 years. MIP are one of very few software companies that create longevity, stability and reliability to our clients.
Because MIP understands the business of financial administration, we offer more than technical knowledge to our clients. Our services include over two decades of experience, ingenuity, perception and a distinctive way of dealing with our “clients” individual needs.
Our roots in emerging markets give us the advantage of delivering cost-effective solutions that meet the current financial conditions across the globe.
By Richard Firth, chairman and CEO of MIP Holdings
Whether it’s total cost of ownership, return on investment or simply old-fashioned value for money, every IT vendor has a reason why customers should shell out large amounts of hard-earned cash to buy its wares and then repeatedly go through repeated upgrade cycles, even as they pay annual licence fees. While customers are caught in this trap with financial commitments to their IT suppliers, there is seldom a commitment to guaranteed delivery, reliability, availability and service from the vendor.
The IT industry has made a fortune selling its wares to customers who thought the latest and greatest technology would provide increased productivity, competitive advantage and increased revenues. While the jury is still out on what value technology has delivered, there can be no doubt that most, if not all companies are dependent on their IT infrastructure.
There may be some executives who disagree with the level to which their organisations depend on IT, but simply switching off all computers in the business would soon provide them with a better understanding. Nevertheless, every executive has had second thoughts about the amount of money being poured into IT systems and the returns experienced.
The 2001 slump in IT spending occurred as a direct result of the lack of trust corporations have in IT vendors and their promises. What executives want is an IT vendor which acts in support of their business strategies instead of draining funds in endless hardware and software upgrades and bug-fix cycles.
There have been many attempts at providing customers with a better IT vendor. None of these attempts has ever gone as far as to put an equal share of the financial and stress burden on vendors to deliver or suffer some form of financial discomfort when IT projects fail or business applications fail to deliver as promised. Who has not heard of large ERP projects costing double, triple or even more than the original cost estimates because of unforeseen difficulties or poor enterprise project management? The enterprise project management is the management responsibility the board of executives take when a project is implemented across the enterprise.
The only solution that can provide peace of mind for customers, as well as guaranteed long-term income for IT vendors, is an arrangement in which corporations outsource their full IT infrastructure to an IT vendor with guarantees of service delivery. Not the usual outsourcing arrangement we are used to, however, but one in which costs are as constant as the technology service delivered.
If done correctly, as the risk-based billing model devised by MIP Holdings, a South African software development house pioneering the concept of risk-based billing, has demonstrated, customers can hand over their entire IT function to an outsourcer, retaining only one IT employee at the CTO or IT manager level. The current trend is to call the concept or service delivery “Software as a service” or SaaS.
This employee will be responsible for ensuring the IT supplier delivers the service the company requires, to keep the business running. In other words, they will be an IT-savvy businessperson ensuring the IT vendor delivers measurable support to the business through some form of technology and service agreement.
MIP’s risk-based billing has been designed to provide such a win-win outsourcing collaboration. The customer loses the problems of constantly looking after its technical infrastructure, is able to focus on its business and improve revenues and profits by using the technology service provided. MIP, or any vendor, is assured of an annuity income as long as it supplies the service according to its service level agreement (SLA) and the customer is assured of value-adding technology.
The risk-based billing outsourcing model MIP has devised is the Full Monty. MIP takes control of the company’s applications, hardware, development and design functions and delivers it all as a service. There are no additional charges for operating system updates or hardware replenishments, simply a monthly fee for the duration of the deal.
Moreover, payment is not simply a set fee that is paid irrespective of the performance of the technology, but, as the title risk-based billing suggests, it is based on one or more of the client company’s key performance indicators (KPIs). The better the customer’s business performs – assisted by its IT systems – the more it pays. Conversely, if IT does not play its role in improving and streamlining the business resulting in lower revenues, the client pays less.
To arrive at an arrangement based on risk requires more than selling a CD with some software on it. The vendor needs to get close to its customer and to understand its business and processes well enough to be able to make a difference.
It is only by knowing what makes the business tick that risk-based billing can work and the customer can be charged according to KPIs.
The fundamental idea is that the vendor knows the business and processes so well that they in turn understand what makes the business grow; therefore the vendor knows what business KPIs should be used to measure business growth or success. The KPIs should mimic those used by executives in the client company to measure their successes or failures. This ensures for the first time that the vendor is pushing in the same direction as the client board or executives.
For example, a pension fund administrator may require IT services to efficiently administer its members. Charging for its outsourced IT services according to the number of members in the scheme is an effective measure of how technology is benefiting the company. The easier it is able to handle members, the more time the company has to get new members signed up as opposed to struggling to manage the business and IT. A more versatile system not only impresses the administrator’s clients, it also gives the administrator’s clients confidence that the administrator has the tools to do the job. Additionally, the easier it is to implement flexible administrative functionality, the better the company performs, the more revenue it brings in and the more it pays for its IT.
There has long been a drive among businesses to focus on core competencies and the company’s unique selling proposition, as this is what its customers pay for at the end of the day – not whether they run DOS on an XT or Linux on a mainframe.
Traditional worries IT provides its owners, such as software licensing, maintenance fees, technology used, standards, security, sufficient disk space and bandwidth concerns are also a thing of the past that only concerns the vendor.
Another difference in MIP’s risk-based billing model is the lack of a centralised architecture to handle the outsourced applications and data. Unlike some companies that offer one of many virtual locations on a central hard drive at the outsourcing company’s data centre, the risk-based model permits customers to retain their intellectual property and control over the security of its data. It does this by running and managing the customer’s infrastructure on the customer’s site. This is a variant or addition to the traditional consulting definition of SaaS.
Telecoms infrastructure plays a large role in how the client implements the model. Often the telecoms infrastructure is not reliable enough to guarantee 99,9% network availability. There are many networking companies that provide penalty clauses when a reasonable service level is breached; however, these penalties are often difficult to justify when comparing downtime for an operational process in a business.
Nevertheless, on- or off-site, the vendor retains total control of the technology. This allows the company to take advantage of economies of scale and lower cost computing without worrying about internal customer politics. Whether the application runs on Windows, Linux or a mainframe is irrelevant as long as the users log on each morning and do their jobs in support of the company.
SaaS is all about service delivery and risk-based billing is all about the billing model or IT vendor revenue model.
The model also provides a single point of contact. If something is not functioning properly or if an application needs to be modified, the vendor takes care of it. The vendor may well have its own outsourcing arrangements with third parties, but this is invisible to the customer.
The enterprise service bus, or ESB, has become a leading architecture to allow organisations to choose the best of both worlds. Some IT services are delivered in-house because of data or IP concerns, and other services are linked into a service bus to allow integration with systems that are not cost-effective to run internally. Some of these systems that are available today are payment systems, credit bureaus and banking interfaces. The billing for these services is normally transaction-based, and they lend themselves favourably to the risk based billing model.
The idea for risk-based billing was originated by MIP and was implemented by Nasdaq-listed Progress Software Corporation as the concept of SaaS in which business applications are delivered as subscription services. Progress has noted that the ubiquity of the Internet has enabled companies of every size to take full advantage of the power, simplicity, and flexibility of services-based business computing.
Progress itself has great phenomenal growth using this model and plans to extend it to the database and tools it supplies. Through MIP’s risk-based billing model, Progress receives a disproportionate percentage of its global SaaS revenues from South Africa – a relatively small IT market in comparison to the US or Europe.
Why would customers choose to have IT services delivered in this way? If it was so efficient, surely the larger business application vendors would be doing it already? The answer lies in responsibility and accountability for the software these companies put into the market. The software giants want no part of guaranteeing the efficacy of their products.
The large ERP vendors are touting the “implement vanilla and don’t customise” line to convince their customers that installing their ERP applications out of the box (without modification) is the best solution or best practice. It certainly makes the ERP implementation task much easier and doesn’t permit huge cost overruns (perhaps only double the initial estimate). And this vanilla software supposedly applies to all companies across the board in every vertical the vendors serve.
The question customers should be asking is “What happens to our competitive advantage when we all rely on exactly the same mission-critical software?” The answer, put simply, is: “What competitive advantage?”
A recent Dilbert cartoon spelt out the best practices business conundrum very clearly:
Many universities around the world teach strategy using the book “Strategic Management Concepts and Cases” by Thompson and Strickland. The following paragraphs are taken from the book:
The SAAS model allows for systems to be customised to suit a customer’s ever changing strategic needs. The important component in the billing model is the continual investment the vendor must make to keep the application new. A number of technology resources are made permanently available for ongoing customisations or input of key differentiators.
In the risk-based model, the vendor becomes intimate with each customer’s business and understands how to deliver value and improve revenues through KPIs. It is therefore able to create an infrastructure designed specifically for each company’s strategy and market, working with the customer to grow the business and consequently the monthly IT fees.
Providing IT as a service on a risk-based contract (depending on the KPIs) means the vendor is in partnership with each client. If the client succeeds, the vendor makes more money; if not, the vendor shares the pain. In simple terms, the vendor invests in its customer’s revenue generation instead of only trying to move product and collect revenue from the client.
Once all the theoretical benefits of risk-based software services have been examined, most companies acknowledge that it all sounds good, but want more specific benefits than this IT model can deliver. Specifically, they want to be able to weigh the differences to determine if the risk-based services model is an IT moneymaking scheme with the customer as a sidelined spectator, or if it is a real partnership where both sides win.
Below are a few of the critical aspects of MIP’s risk-based billing model.
It is simply not possible for a CTO to know everything there is to know about hardware, software and networking, but they should know all there is to know about how an integrated IT solution serves the best interests of the business.
Unfortunately, the traditional process of selling a business application into a large corporate involves taking the IT executive decision-making team on overseas trips to wine and dine them, and perhaps talk a little technology. This treatment is an easy way to win the favour and create a bias towards certain products.
The recommended SaaS service model avoids this conflict of interest by delivering a business service – the actual technology behind the service is the turf of the vendor and irrelevant to the customer. It may sound unusual, but in this business model, all parties are compelled to act in the best interest of the customer’s company and not the individual.
If the vendor is not prepared to lay down some form of risk/reward, then the solution was probably not right for the customer.
Any IT implementation needs a team of programmers for maintenance and additional development requirements. This can be costly. The service model permits companies to add their own unique competitive advantages to their software – without the burden of an IT team.
MIP provides applications based on known best practices for the verticals it operates in, but does not insist clients retain only these services. On the contrary, since it has an investment in the growth and prosperity of its customers, it encourages them to bend the rules, break out of the norm and excel through the innovative use of technology.
Instead of the ERP vendors’ “don’t change the software” message, customers are encouraged to make changes, but in partnership with the vendor that has taken the time to get to know the company and can advise on realistic changes that will benefit the business.
The IT division may be run from within the company in this model, but the equipment and applications belong to the vendor. You can’t play politics and one-upmanship in a department of one, so the CTO/IT manager has one focus: the business. Furthermore, a bias towards certain technologies and frequent loss of skills is no longer an issue customers have to deal with.
Due to the worldwide shortage of experienced IT skills, often IT personnel are treated differently in a company to staff working in other departments. The very nature of the IT department’s work may allow an IT resource to work from home or enjoy more flexible working hours to facilitate work being done when company users are not logged on. This flexibility may cause tension between departments and sometimes charges of favouritism are levelled at IT. The service offering allows the technical resource to be treated differently without attracting the attention of other staff and improves intellectual property retention.
Traditional outsourcing is not a flexible option. Customers are presented with the solution vendors have to offer as an all-or-nothing deal. In the real world, every company has slightly different needs, whether in the field of disaster recovery, equipment required, process changes or any other facet of technology.
There is no silver bullet or one-size-fits-all solution, and the service model permits companies to use only what they need, with additional resources available almost immediately should they be required.
It is important to note that, even though MIP is software-focused, the entire IT infrastructure can be included in the model: hardware, networking, software, operating system and even existing business applications.
Many traditional IT vendors have no stake in their customer’s business and do not focus their efforts on improving the bottom line. More often than not, individual staff members are focused on implementing popular applications and going on courses in order to raise their skills or market value, with the ultimate goal of a better job somewhere else, earning international recognition or becoming a highly paid consultant.
The service model delivers a strategic approach to IT, designed to make the vendor more money. But due to the structure of the model, the only way it can earn more from its customers is by improving the performance of the customer’s KPIs. In other words, if MIP wants to improve revenues, it first needs to play its role in improving its customer’s revenues.
Will an ERP vendor agree to a deal where it is paid a minimum fee for installation and a set monthly fee once the software is installed and running? Or will the company insist on being paid for delivering a CD with some software on it? The answer is simple: you pay for the CD and then you pay more during and after the installation, and then you simply keep on paying.
With the risk-based billing model, one can’t sell vapourware as payment is only made when services are delivered. The process of hardware and software installation and configuration is hidden from the customer, as all it wants is to run its business. This model forces IT companies to assume financial risk themselves and earn the customer’s faith in their competence.
Providing SaaS means the vendor takes full responsibility for implementation, configuration and development. It is only once the system is up and running, with users satisfied it provides the functionality required, that financial returns are truly achievable. And should the system fail after going live, penalty clauses ensure prompt action to get the system running again or the repayment of previous monthly sums until the system does go live. Once the vendor has repaid much of the money it received in previous months, the client is left in a neutral cash position with only the cost of time being lost.
Not only does this model place the risk squarely on the vendor’s shoulders, with real penalties for non-delivery, it will also refocus technical managers on the benefits of experience. Today most IT managers have a host of young, newly certified IT skills running their data centres. When profits depend on delivery and uptime, not who can reboot the latest version of an operating environment, the most valuable people will be those who have years of experience making technology work.
Since the vendor shares risk and is only paid when the system is online and supporting the business, project plans shorten, with definite timelines and review periods (measured in days rather than months). Projects doomed to failure will not drag on for ages consuming funds, but will quickly be identified and killed. The ongoing investment decision is not left purely to the board of the client but must be made in conjunction with the vendor. The vendor’s appetite for investment is a good barometer of the confidence the party has for making the company money and meeting deadline promises!
As the vendor foots the bill until implementation is complete, all specifications and requirements will be written in plain English to ensure everybody understands what is expected.
Like all IT projects, good project management by the vendor with involvement and commitment of the customer are mandatory. The risk factor drives the vendor to make certain that concepts are clear and deadlines are managed and delivered. The vendor cannot simply rely on a well known brand, for example, “no one ever got fired for buying IBM”, but has the same vested interest as the customer that a functional system is delivered.
Vendors are paid by deliverables based on agreed KPIs. It is therefore in the best interests of the vendor not only to provide a good service beneficial to the business, but also to ensure a long and fruitful relationship – a necessity if it is to regain its investment up-front and gain profit from the deal.The relationship will benefit both parties for the long term and foster true collaboration to deliver the best service possible. Political finger-pointing will also decline as there will be no potential benefit from playing games at the expense of the business.
According to Forrester Research: “Companies are finding that in order to grow they must form partnerships or collaborations with companies that are part of their ecosystem.
“These ecosystems increasingly specialise and rely on the intellectual property of partners, suppliers, financiers, inventors, transformers and brokers.”
Keeping the crown jewels in the castle, or the data inside the company and not on a large shared server at an outsourcing vendor’s premises, ensures data security from all points of view.
Most importantly, the customer has some control over access and can monitor connections to the server, providing management with that extra feel-good security that they have not abandoned their confidential data to an unknown administrator in some far away location.
This is an important differentiator to the standard SaaS model.
No one company can do it all, not even IBM or HP. The services model MIP promotes may only present one face to the customer, but behind the scenes hardware, software and networking companies partner to deliver the full solution at the best price possible.
In the traditional outsourcing model, crashes and system downtime were a vendor’s dream as they were paid by the hour to fix the problem. The bigger the crash, the more people had to be sent on-site to resolve it, and the bigger the bill at the end of the month. There was no real motivation in ensuring customers’ IT systems were reliable and available at all times so the customer can be more profitable.
In the risk-based model, the vendor is liable if the system goes down. The vendor is now paid to write good software that serves the needs of the customer and performs to spec. The best and most reliable components will therefore be chosen to assist in keeping the vendor’s staff away from customers – because all costs are for the vendor’s account and there is also the question of penalties.
Consequently, the commitment to the customer from all partners is far greater than the traditional process of blaming everyone else. Service levels to the customer as well as the customer’s customer will be vastly improved.
Instead of the IT director/manager spending time defending late delivery, expense over-run, functional mismatch or performance issue of a system to the board or executive, they will spend their time managing the vendor.
When a company outlays capital up-front for a system implementation, the IT manager has to defend or motivate new capital injections to the board in the event of over-runs. In the risk approach the IT manager has to use their skills to manage a vendor of service until the required functionality is up and running, with limited financial inputs.
Customers can even look at changing their CTO-level pay structures. Their pay should be tied into the performance of the corporate IT infrastructure – according to the same KPIs on which the vendor’s payment is based.
Software will now be used as a tool with specific deliverables – and IT management should have enough faith in their own decisions to risk some pay on the performance of the systems they design.
In other words, should management have the courage, all IT expenses can be linked to the performance of systems, as well as the growth of the company.
The greatest benefit of risk-based services is the constant billing. Each customer knows what its IT will cost every month, whether the vendor spends the entire month working on the system to get it right, or even if it doesn’t come onto the premises.
Both parties have a contract that says the IT bill will be a certain amount over the duration of the contract (normally three to five years). No surprises. Should the customer want extraordinary “additional services or development”, the cost can be amortised over this time, or even built into the original quote. This would have to be a totally different line of business that must be developed and run its course under a different services contract.
Best of all, there is no huge initial outlay to buy hardware, and there are no licence fees to pay. If the vendor wants to make more money, they had better make sure they provide the support business needs to grow according to the KPIs determined at the start of the project.
Traditional outsourcing is not aimed at smaller companies that do not have the resources to manage the template approach large outsourcing firms impose on their clients. Risk-based billing provides smaller companies with the opportunity to outsource their IT at a reasonable, fixed cost and focus on becoming large companies. The SaaS centrally hosted model is of particular benefit where economies of scale help smaller companies to collaborate with each other to provide a world-class system.
The risk-based services model is unique in its flexibility. A large enterprise may derive value from a host of applications and customisations, but a small company will only need a few applications and tweaks to make the system fit its unique business model – perfect for a services approach to software provision. IT spend is controlled and returns are measurable.
This model can be a costly undertaking when implemented for the first customer. However, economies of scale kick in as more customers are signed. Even though each company runs its systems on-site, the centralised support and development costs are minimised as the model expands.
With legislation demanding better reporting and accountability from corporate leaders the world over, the risk-based model of outsourcing caters for the corporate governance requirements companies must adhere to.
As any business with a computer is reliant on it, ensuring the systems are available and secure has become the CEO’s job as well. The services model allows corporations to know exactly what their IT costs are – and there is no large cash outlay.
Additionally, contrary to existing IT sales where existing customers make the easiest sales every year because they are over a barrel – in terms of databases and proprietary software – the risk-based model has no additional cost surprises over the course of the deal.
What place is there for entrepreneurial thinking in standardised business software? Very little if one subscribes to the ERP vendors’ recommendations not to change their software. While the services model also provides standard software to companies, it also includes the flexibility that allows entrepreneurs to perform out of the box and establish their unique approach to the market.
Most large companies let consultants make IT decisions for them to ensure employees are not held accountable for bad decisions. This model makes everyone accountable for all decisions and removes the requirement to use consultants. The cost savings from this act alone are enormous.
The implementation of hardware is normally based on the revenue earned and the number of frills deem necessary. In this scenario the hardware is normally outdated when it is time for the client to use the extra space, memory or frills. However, the risk-based billing model requires that the correct hardware is implemented for running the applications or users specified. Sometimes the hardware agreement is moved outside of the risk-based billing model as hardware vendors have a fixed cost up-front. The hardware can be purchased with capital expenditure in conjunction with the risk-based billing partner to ensure rightsizing, effective product and value for money. Rental options are freely available in the market and expenditure is smoothed over the period of the risk-based billing contract.
The barriers to entry in the IT industry have been fairly low over recent years because of technology commoditisation. Risk-based services once again raise the barrier to entry.
Waiting for the big payout when a customer signs a deal is not going to work any more as this model does not demand an up-front payment. In other words, only companies willing to take a risk on their own competencies and with the resources to back up their rhetoric and deliver will survive and grow.
Risk-based billing is set to change the image of the entire IT industry, and the software industry in particular. The IT giants of the future will be those who can deliver a product according to customer needs and are willing to bet their product delivers, not those with the best sales and marketing teams.
The IT mantra as we move further into the 21st century will not be upgrade, patch, bug fixes and pay annual license fees with no guarantees: IT will deliver business services and guarantee performance to specification, or your money back.