Cost reduction tips for your strategic sourcing contracts

Review your sourcing contract portfolio

The 80/20 rule typically applies to your contract portfolio, where 80% of your spending comes from a smaller number of significant contracts. Focus on these initially, as they provide the greatest opportunities for potential savings.

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For your major sourcing contracts, you should review the following key contractual terms:

Commitments and term: How long are you committed? I typically recommend contracts with no longer than a three-year term, including options to extend. Imagine how the world economy has changed in the last year alone, and your business and IT environments in the last three years.

Ability to terminate or change items: Can you adjust contractual terms or commitments, and what are the associated penalties or costs to your organization?

Clauses that allow flexibility to adapt to business changes: Negotiate clauses that allow contractual (and commitment) modifications based on an acquisition, divestiture or significant business change.

Staffing models, costs and locations: For people-based contracts, review these items and look for appropriate opportunities. For example, some legacy support can be provided through an on-site/off-site (or offshore) staffing model. Also look for changing market conditions. For example, the Satyam scandal in India will likely make rates and services more competitive in the short term, and reduce the salary inflation that had been significant for the last few years.

Don't wait for year's end to renew agreements, start now. Every IT shop has a vast number of maintenance and support contracts that can be spread through the year, reviewed, challenged and renewed … well before Dec. 31.

Consider a cost reduction program

CIOs can also sponsor a formal cost reduction program to get the most money out of their sourcing spending. A cost reduction program should have clear targets and recognize and reward benefits delivered. The program should also include a review of spending categories, significant contracts and opportunities for consolidation. Here are some tips for getting your cost reduction program going:

Spend analysis and management Know what you have spent, how much you plan to spend and where your business is going. The sad fact is many organizations lack visibility to real information about their spending -- they have lots of purchase orders and invoice data, but it is not complete for all geographies or purchasing systems, nor categorized or consolidated. Many more do not manage or control their spending and leave it to IT. The bottom line is that by gaining visibility to IT spending and managing spending through development and execution of supplier segmentation and consolidation strategies, you can expect to take 10% to 20% in cost reductions or service improvements. To get started on your spending analysis, ask yourself the following questions: Do you have a view of historical and planned spending, globally, for all major IT market categories, such as applications, infrastructure, telecommunications and resources (contractors and services)? What major IT initiatives, such as an ERP system implementation or business drivers such as a merger or acquisition, could significantly affect future spending? How many active suppliers do you have in total, and by IT market category? Which suppliers are strategic or critical for each market category? How much of this spending is professionally managed through a procurement or sourcing team?

• Set and communicate program goals. Recognize and reward your associates who deliver.
• Challenge the requirement. First, do we absolutely need this product or service? If the answer is yes, then how much, and what level of service is required.
• Review usage or performance of the product or service. Are you getting value from the contracts related to that product or service? For example, are you using all of the software licensing that you currently own? If not, look to reduce associated maintenance and support costs for the unused portion, or retire licenses.
• Look for areas where there may be redundant costs, such as when you buy laptops with warranties but pay a service company to fix them. Or where you may be overservicing the client: 8x5 support is the real requirement, but you are paying for 24x7.
• Be aware of opportunities associated with changes in the lifecycle of applications. Somehow, replaced applications and their associated support costs tend to live on.

Use the supplier as a resource

Finally, include and ask your suppliers for cost reduction tips. They may be aware of areas where efficiencies can be realized, or be able to provide more appropriate and cost-effective service options. In addition, follow these guidelines for tapping into your suppliers' expertise:

• Be open in sharing your challenges and cost reduction/service improvement objectives with suppliers. They also know the realities of today's economic crisis, and the good ones are likely already developing solutions to meet your needs.

• Look for efficiencies associated with multiple services provisioned by the same supplier. For example, if you have tier 2/3 support from the same supplier, there may be opportunities to share resources, including on-site, to reduce costs without affecting service levels.
• Implement/activate gain-sharing clauses. Give incentives to the supplier to provide more value. For example, a supplier independently proposes a change to an existing service that provides a $100,000 cost reduction. Upon review and agreement, the supplier would receive 25% of the benefit for a one-year period.
• Ask the supplier to also implement an improvement program on its side, and to recognize and reward its associates for proposing and implementing cost and service improvement ideas.