January 20, 2011, 5:27 PM — Mistakes happen. Situations change. Yet very few outsourcing customers regularly check their outsourcing invoices against their original contracts on a regular basis. And that means they may be leaving thousands--or millions--on the table, says outsourcing consultants Adam Strichman and Mark Ruckman.
An outsourcing audit, especially these days when every dollar counts, can be a good investment.
"In addition to reviewing invoices for errors and SLAs and the typical stuff, there are lots of rocks to overturn...areas where the vendor may not be living up to its responsibilities, or where they may be making financial errors," says Strichman, founder of Richmond, Va.-based outsourcing consultancy Sanda Partners. "The goal is to find money you may be owed or services the vendor is not doing--or doing right--to use as leverage for other negotiations."
Outsourcing invoices can be complex--and dozens of pages long. What's more, there's often only one person on the provider side and one person on the client side who understands the details. No one asks, "Does the contract really allow them to charge for that?" or "Is that line item even relevant anymore?" Seemingly insignificant line items can add up over time.
Full-blown contract audits by a third party can be expensive, but it is possible to conduct your own audits internally. Reserve a conference room, have the person most familiar with the contract explain each line item to an IT executive unfamiliar with the invoice. "After his or her shock about the complexity of the invoice, you will find 10% of the line items will drive a lot of discussion," Strichman says, "and 5% of them can't be explained at all."
Such an effort can yield at least 1% of the total contract value in savings for each year the invoices have gone unchecked, says Strichman. At a minimum it will drive discussion with the vendor about items which may not be necessary, whether the charges are correct or not. Ruckman, who works as an independent outsourcing consultant in conjunction with Sanda partners has seen clients save anywhere from a few hundred thousand dollars to over six million per year.
When you approach the vendor about audit findings, don't expect to be greeted with open arms. "The providers can be defensive. Some are trying to protect their base charges and others didn't realize these billing issues had evolved over the past several years," says Ruckman. "But in the end the providers all come around."
Here are nine common areas for errors in outsourcing invoices.
1. Leased Space
If you are renting space to your provider, double check their leasing obligations and responsibilities. Many times the customer continues performing certain data center duties, unaware that the provider is now liable for them. The potential cost savings increase with the size of the facility.