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ITIL Service Provider types – Type 3 or External Service Provider

This blog post will be the final part of our “ITIL Service Provider types” mini-series. Now would be a great time to read previous articles, if you haven’t already done so:

Here’s a quick recap from previous articles: Type I (Internal Service Provider) is responsible for service delivery within their own Business Unit (BU). Consolidating all Type I providers into a single organization will create Type II – Shared Services Unit, and when services are provided outside the company – it’s Type III or External Service Provider.

Type III – External Service Provider

When looking at internal organization, External Service Providers are similar to Type II providers, but for multiple (external) companies. They provide generic services, so the companies that use them have to find their own way in aligning those services with business needs.

External Service ProvidersFigure 1– ITIL Type III – External Service Providers

External Service Providers will deliver the same KPIs or other measurable objectives as Type II providers (Shared Services Units – SSU) which adopted best practice frameworks (ITIL), or standards such as ISO 20000. However, by using services from external providers, companies have more options in finding one that best fits the targeted business service. By using multiple providers (as shown on Figure 1), companies aren’t “locked” with single provider capabilities.

Benefits of the Type III Service Provider

If competition uses an External Service Provider, using the same model diminishes any advantages they might gain by doing so, but the main advantage would be in asset and risk ownership, which is now in the hands of the service provider.

For example, if your company decides to outsource managed desktop service, which often is the most expensive part of IT service, you no longer have a substantial amount of monetary value locked into equipment and software that has to be managed and maintained, and loses value over time. There is no longer any need for keeping track of those assets, spare parts and stocktaking, which releases a significant amount of resources that can be allocated for other things. All costs are predictable and correspond to the Service Catalogue, which makes the finance department very happy during forecasting and budgeting season.

Type III Service Provider drawbacks

There is a common misconception about External Service Providers being cheaper than Shared Service Units (Type II). This isn’t true for many reasons, but I’ll mention only the most important ones:

  1. Everything an SSU has to purchase in order to provide a service, has to be purchased by an External Service Provider as well. However, by spending a large amount of money at once on necessary equipment, external providers have to treat that purchase as a loan, as money won’t return in a reasonable amount of time. Every loan carries a risk, and risks have impact on overall service price.
  2. On top of equipment costs, external providers also have personnel who will maintain, manage and operate that equipment. In general, service providers’ employees have better salaries than their counterparts working in non-IT companies.
  3. As in any other company, external providers have HR, marketing, purchasing, finance, sales, management and other supporting departments, which all contribute to general overhead, and have a significant impact on service price.
  4. We’ve mentioned before how risks in service delivery are transferred to the External Service Provider. Well, those risks haven’t magically disappeared; they are transferred from your organization to the external provider. And all risks cost money, which again contributes to the service price.
  5. External Services Providers are businesses, which mean they have to be profitable in order to stay in business. Profit comes from charging you for services provided – a bit more than underlying costs.

How do customers choose between types?

If you had the opportunity to read the whole mini-series on service provider types, you’ll see that each provider type has benefits and drawbacks. On top of that, when making a decision regarding the best option for your company, you have to be aware of possibletransition costs (costs of migrating from one operating model to another, or between service providers), and transaction costs (costs of finding a suitable provider, negotiating, defining requirements, agreements, relationship management, changes, disputes, etc.).

Here are some questions that may help you decide:

  1. Are highly specialized assets required? Are those assets going to be idle after the required activity is done? → If yes – it’s recommended to outsource it.
  2. Are those assets going be obsolete, or lose a significant proportion of the value over time? → If yes – it’s recommended to outsource it.
  3. Is the activity required performed sporadically? → If yes – it’s recommended to outsource it.
  4. Is the activity simple enough without any major changes within the activity over time? → If yes – it’s recommended to outsource it.
  5. Can you define good and satisfactory performance? → If no – it’s recommended to keep it in-house.
  6. Can you measure what constitutes good performance? → If no – it’s recommended to keep it in-house.
  7. Is the activity tightly connected with other activities and processes, where in case of separation a new layer of complexity would be added? → If yes – it’s recommended to keep it in-house.

Customers can decide to switch between types of service providers (Figure 1) based on the answers to those simple questions. Of course, the answers to the questions themselves may change over time, depending on new economic conditions, regulations, and technological innovation – with the latest being inevitable.