Ways to Save Money on Current Outsourcing Contract

CIO.com –

You may not have signed a contract with your third-party IT services provider solely to cut costs. Maybe you were seeking specific skills or farming out non-core work to focus on strategic initiatives, or looking for a back door into an emerging economy.

But now, in these tough economic times, you're searching for savings under every rock. The good news is, whether you signed your current outsourcing contract three months ago or three years ago, there are plenty of ways to trim your IT services costs today. Here are nine techniques that can yield significant savings. [See also, Outsourcing Prices: Why the Recession Isn't Really Driving Them Down.]

1. Enlist your service provider to identify cost-cutting opportunities.

"Depending on how long your deal has been in place, you are more than likely in a situation where some of the employees of the outsourcer are more familiar with your technology environment and processes than internal enterprise employees," says Frances Karamouzis, research vice president for Gartner Research and Advisory Services.

Ask your vendor to make it job one to mine account personnel for their best ideas for process and productivity improvements. Ask them to prioritize the plans that will produce savings in the current fiscal year, advises Karamouzis.

The best outsourcing contracts contain provisions that require providers to work with customers to accomplish cost reduction, says Daniel Masur, a partner in the Washington, D.C. office of law firm Mayer Brown. If your contract does not include such provisions, create incentives, such as a formal agreement offering employees with the best ideas a bonus or a small percentage of the savings, a credit for the outsourcer on the next invoice, or a gain sharing deal that will reward your provider with a portion of the savings achieved.

"Even if not provided for in the original agreement, gainsharing may be agreed to by the parties to fund projects, transformational activities, or cost saving initiatives that both parties are interested in, but that the customer is not willing or able to fund [on its own]," explains Masur.

2. Negotiate gold, silver and bronze service levels.

Work with your outsourcing provider to create a tiered IT service offering, advises Masur. Then allow your internal customers to select the appropriate level of support and cost for their business units' needs.

3. Reap the benefits of standardization and process maturity.

Remember those painful years your IT group spent toiling over process improvements so that you could work more effectively with your IT services provider? Well, put that CMM maturity level to good use. You may be able to move some work to a new, more cost-effective provider in an emerging offshore location with limited service level interruption.

"One client was able to have some very sophisticated development work performed by a firm in Pakistan at a fraction of its outsourcer's cost," says Edward J. Hansen, a partner in law firm Morgan, Lewis & Bockius's business and finance practice. Hansen says the outsourcer and the Pakistani firm worked together to ensure that the outsourcer could support the work after it was completed by the Pakistani firm. Because both firms complied with established standards for integration, service was not compromised for the customer. Adds Hansen, "Without standards compliance on both sides there would have been serious SLA implications to this."

4. Increase the scope of the contract or extend the terms of the agreement.

Re-examine your IT portfolio to see if cost savings might be achieved by transferring other functions to your outsourcing vendor. Or consider extending your outsourcing deal beyond its current expiration date. Doing so may give you leverage to ask the provider for cost savings, says Masur, or enable you to save money by renegotiating a longer deal.

5. Verify provider performance.

Vendors are facing the same tough times as their customers. Consequently, many providers are responding to the pressure by reducing headcount, underperforming, or shirking their contractual duties.

Good governance is the key to holding the outsourcer accountable. "While closely monitoring the provider's performance may be time consuming and even costly, it is imperative that the customer make this investment," Masur says. "The time and cost associated with cleaning up the contractual mess that would almost certainly result from customer inattention would be far greater."

6. Opt for more offshore delivery.

Take a second look at the work you're having performed onshore. The maturity of offshore offerings may have improved since you initially inked your deal. In addition, many vendors now have nearshore centers that may be able to do the work more inexpensively, minus the time zone and other distance issues, says Karamouzis.

7. Turn down the volume.

Do what you can to reduce your service volumes under your existing contracts. Efforts like application rationalization, whereby you analyze your existing application portfolio and decide which systems can be eliminated or consolidated, can lower your support costs. But be aware that any minimum volume commitments in your contract may mean you have to maintain a certain level of business with your provider or be bumped into a higher price bracket.

8. Renegotiate some or all of the contract.

More than 40 percent of enterprises are discussing renegotiation with their outsourcer this year, according to a June 2009 Gartner report. "Not only are clients asking, many clients are successfully negotiating some of type of discounts," says Karamouzis.

If you've been in your outsourcing relationship for at least a year, you should be renegotiating, too. Of course, there's one big caveat, says Karamouzis: "Be vigilant and make sure that quality and service levels are not being sacrificed" to deliver a reduced rate.

You can ease the provider into lower prices by offering a quid pro quo. Consider assuming more risk in areas like cost-of-living adjustments or currency fluctuation, take lower pricing now in exchange for increased pricing risk in future years, or look into relaxing other contractual rights like termination for convenience on a temporary or permanent basis, says Masur. "Look for protections [you can relax] that seem less valuable now that you know the provider," he says.

As an alternative to renegotiating prices, you might suggest altering the timing of charges to defer payment or ask for more productivity per provider employee. "If the outsourcer discussion on renegotiate rates does not prove fruitful, challenge the service provider to find other ways to save you money," says Karamouzis.

9. Exercise your right to audit, benchmark or walk away.

An audit can uncover overcharges, while benchmarking can be used as leverage to negotiate lower pricing.

"Typically, [the suggestion of benchmarking] would arise after the customer obtained information suggesting that the provider's pricing was above-market in at least certain areas," explains Masur. In such an instance, the customer asks the provider to respond, cautioning that if they are not satisfied that prices are still competitive, they may have to initiate third-party benchmarking.

"This often leads to a relatively candid discussion regarding pricing and, in many cases, to a price adjustment in at least some areas," Masur says.

While you're at it, take another look at the work you're sending out the door. Selectively terminate services or contracts that are no longer required or are not considered critical, Masur advises.

Consider insourcing or using another provider to perform in-scope work. You may be able to save money and obtain the same services from another provider or by handling them in-house. The suggestion that you might pull the plug could be a good bargaining chip to negotiate lower prices or greater productivity with your incumbent provider, adds Masur.

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