How to make the most of hardware service contracts

Identify the right amount of support for your data center to manage costs efficiently and keep servers running.

Adding virtualization into IT data centers enables more services to run on less hardware. Running atop a hypervisor, a single server can host multiple virtual machines (VMs). By consolidating physical servers, organizations may find that they have far more optimized use of their resources.

At the same time, consolidation also brings about the need for greater levels of availability. When a virtual host goes down, more than one VM and more than one IT service goes down with it. Today’s virtual administrators recognize that consolidation requires new levels of high availability that—until recently—were only possible in the largest and most expensive data centers.

High availability only gets you so far, though. When a problem strikes a server or a piece of networking equipment, high availability enables the IT service to relocate elsewhere, but it does nothing for fixing the initial problem. Solving that problem often requires help from the vendor.

Usually, that assistance is codified in the form of a hardware service contract, which sets the terms for a paid for agreement between your company and your vendor. The intent is to provide follow-on support for purchased equipment over a period of years.

All IT professionals are probably aware of why these contracts exist, but what they don’t know is that not all contracts are created equal. Because they add from 10% to 30% in extra cost per year on top of the equipment purchase price, a hardware service contract will likely consume a substantial quantity of your annual operating budget. And if you’re not careful about defining exactly the support you need, you might find that you’ve purchased too much or—even worse —too little support when you need it the most.

If you buy a contract that can be activated seven days a week and 24 hours a day with a two-hour response time, it’s a much better solution. But expect to pay more for the benefit, said independent consultant Owen Hathaway, who has worked with a range of service contracts within larger organizations of 2,000 to 10,000 employees.

Making the determination about what you really need starts with a realistic risk analysis, Hathaway said. With an eight-hour-a-day, five-day-a week contract, the real amount of outage can be up to three days if the problem starts after hours on a Friday evening, he said.

By asking yourself these basic questions, he said, you can begin to assess your risk:

  • What is the risk to the business that is associated with this service being down?
  • Can this server or service afford to be down overnight?

Hathaway said he recognizes the added costs for greater contract benefits, such as hours of the day and response time. But what all businesses must do first is identify—on a service-by-service and device-by-device basis—whether a desired contract meets their service-level agreements as well as their business objectives.

Identifying what is and what isn’t under contract is another time and money liability. Maintaining a current hardware inventory is the most important activity in service contract management, Hathaway said. “The biggest thing you need to do is inventory,” he said. “Know what you have— that’s the area where service contracts spend the most time with negotiations.”

Hathaway said an IT pro can spend days trying to find out what’s in his or her data center. “If you have a list of things to work off of, finding the things on that contract that are important, such as validating that the device has been retired or is still in service, can surprise you if you’re not diligent,” he said.

As much as 80% of the time in managing hardware service contracts is spent in just maintaining the inventory. Not having that current inventory means paying for services on hardware that is no longer operational—or worse—cancelling services on critical hardware that should remain under warranty, Hathaway said.

On the other hand, simply purchasing the hardware service contract with the best benefits isn’t always the most cost-effective solution, said Jeff Galina, CIO of Mortgage Cadence Inc., a provider of enterprise lending solutions based in Denver.

“Where you can really start to save money in hardware service contracts is in understanding where your business strengths are,” Galina said. Then, you supplement your weaknesses with your vendor’s help, he said.

If your data center has some administrators with limited networking experience, then you should supplement that experience with vendor expertise. “You go to your switch vendor and say, ‘I need your help to configure these fiber switches—we’ll take care of the Ethernet switches—so all we need is phone support,” Galina said.

First-tier hardware vendors like HP, Dell, IBM, Cisco and others offer comprehensive setup services. But these companies do not often want to assist you with configuration on a continuous basis, Galina said. “They’ll sell you a one-time configuration service contract, but they’re very careful about telling you when the problem is no longer a troubleshooting issue,” he said. “When that happens, they typically won’t assist.”

A typical hardware service contract usually spells out exactly what kinds of support are covered. Both Hathaway and Galina said that although all forms of troubleshooting tend to be covered by these contracts, architecture and design issues are not usually part of the deal.

“Service contracts are a break-fix kind of thing,” Hathaway said. “Architecture is more of a proactive thing in which you’ll need to engage a professional services company to assist. Sometimes you can get your service contracts through that professional services company, if you want.”

Many IT shops, particularly those with limited staff experience, work with professional services companies on complex issues like new service creation and integration. Creating and integrating services often requires additional hardware and software, and those contracts can be managed by the professional services organization.

The reseller that sold the equipment in the first place usually handles the contracts. And, considering the paperwork and other management issues that are required to keep contract terms and conditions straight, finding a good reseller that does much of the work for you can definitely reduce your effort as well as your cost.

Hathaway said that the best strategy is to find a reseller that is particularly good at managing contracts, “Choose a vendor who can track these contracts wisely,” he said. “I would rather select a vendor who will assist me over the life span of my data center with contract management than one who might give me a little up-front break on the price.”

Sometimes refurbished equipment found on eBay or other Internet sites can be another great source of hardware cost savings, but it still requires hardware support. Galina said there are companies that specialize in services for refurbished equipment.

“You can go buy, for example, a Cisco fiber switch on eBay, and instead of spending $20,000 on it, you’ll get it for a fraction of the cost,” he said. “But make sure you get a service contract on it.”
Purchasing hardware second-hand through Internet resellers can be a great way to save money rather than going through one of the industry’s second-tier hardware vendors. Second-tier vendors may sell you a piece of hardware at a reduced price, but that price may not include any form of support. Although you’ll save money at the outset, you’ll be stuck with a problem when that equipment fails down the road, he said.

These short-sighted attempts to save money can create major problems for customers who aren’t careful, Galina said. “I’ve seen startup companies go with a [second-tier vendor] solution, but that vendor often won’t factor in the service contract." Thus, the second-tier vendor will seem more cost-effective than it really is, he said.

Another important consideration is that year-over-year costs with most hardware service contracts typically grow more expensive over time. Although this might lure organizations into what feels like a constant cycle of upgrades, the increasing cost of hardware service contracts for older equipment is intended to reflect the expectation of greater support needs as the hardware ages.

With the right skills and experience on staff—as well as the right spare parts on-hand—organizations can choose to break the cycle of higher support costs. Not opting for service contracts will reduce costs, but it does lay the burden of problem resolution onto the in-house IT staff. For some organizations, though, choosing a policy of spare parts over service contracts can be the smartest solution.

Not every company should buy service contracts for every piece of equipment, Hathaway said. “For example, I’m working with a hospital that is currently dropping 65% of [its] hardware service contracts for network switches. This company found it to be more cost effective to have spare parts, or even entire spare switches, on-hand in case something breaks,” he said.

In the end, a hardware service contract is insurance to assist organizations when the hardware fails. Just like other forms of insurance, finding exactly what you want involves careful analysis of the available options. Choose wisely, because an incorrect decision can mean no support when you need it most.

About the Author

Greg Shields, a Microsoft MVP and VMware vExpert, is an independent author, speaker and IT consultant, as well as a founding partner at Concentrated Technology. With nearly 15 years in information technology, he has developed extensive experience in systems administration, engineering and architecture specializing in Microsoft OS, remote application and virtualization technologies. Shields has authored or contributed to 10 books and countless white papers and webcasts.

Dig Deeper on Virtualization costs, licensing and support issues