Nine ways to save money on your next outsourcing contract

Outsourcing experts, IT analysts (and optimistic vendors) are predicting an increase in IT services deals during the second half of 2009. They foresee an uptick in outsourcing driven by enterprises looking to increase IT efficiency and cut costs.

Unfortunately, some of those organizations signing new outsourcing contracts, so pressured to slash costs, will cut the wrong corners on their new deals and ultimately end up disappointed in the results. "I think when we look back on this period, we'll find that companies' objectives for outsourcing weren't really that different than theyve always been, but their propensity for making bad decisions increased," says Edward J. Hansen, a partner in law firm Morgan, Lewis & Bockius's business and finance practice.

Speeding through the outsourcing selection process or rushing into a deal without an RFP, for example, may save you time and money now, but are more likely to cost you dearly over time. Instead, try these smarter strategies to save money on your next outsourcing deal.

1. Be clear about scope.

Before you even think about starting the outsourcing selection process, complete a thorough assessment of your IT portfolio to determine what can be outsourced, what can't be outsourced, and-most importantly-what shouldn't be outsourced.

"Take a minute to step back and talk to your business customer about their needs and compare them to the IT services you currently offer," says Ben Trowbridge, CEO of outsourcing consultancy Alsbridge. "Doing so will provide you with greater insight into what IT services you should be buying from an external service provider."

"Scope creep" during the outsourcing decision making process is a hindrance to finalizing a new deal efficiently and cost effectively, says Atul Vashistha, chairman of offshore outsourcing consultancy neoIT. "A thorough portfolio assessment also provides data that comes in extremely handy [later on], Vashistha adds.

2. Adopt a multi-sourcing strategy.

The competitive leverage you gain by signing on a small stable of preferred providers instead of a single vendor can not only reduce costs overall, it can also help to mitigate risk through redundancy and provide access to a broader or deeper talent pool, says Daniel Masur, a partner in the Washington, D.C. office of law firm Mayer Brown. Such a multi-sourcing strategy may or may not cost more to manage. "But, if done right," Masur says, "it will offer benefits that more than offset any additional cost."

If you do go the multi-provider route, you may want to create a service level penalty pool, says Marc Stark, a client executive at outsourcing consultancy EquaTerra. Each provider puts a certain percentage of their monthly revenue into a pot to pay penalties when end-to-end service levels are not met. In theory, service level penalty pools will help foster cooperation between the parties, though it's a difficult provision to get vendors to agree to, Stark says.

3. Connect your service lines.

Consider incorporating provisions in your contract that allow for reinvesting savings in one line of service into spending on another line of service. For example, infrastructure savings can be funneled into innovation or transformation in another area. If the outsourcing provider knows it will win additional work, it will be more motivated to find and free up those additional infrastructure dollars, says Ed Hansen.

4. Compel the vendor to cut costs in the future.

Include a contractual provision that obligates your outsourcing provider to reduce costs and charges in the future. The language should require the service provider to work with the client and/or other third parties to achieve reductions in the cost of service delivery, says Masur. You can oblige the vendor to prepare a proposal, at your request sometime in the future, identifying all viable means of achieving the desired reductions without adversely impacting business objectives or requirements.

5. Entertain new delivery methods.

Software-as-a-service, virtualization, cloud computing, infrastructure on demand-there are a host of new multi-tenancy, pay-per-use models available to IT services buyers today that will lower your IT costs.

"Clearly these come with compromises but [our] research has shown that many clients report satisfaction with some of these models," says Frances Karamouzis, research vice president for Gartner Research and Advisory Services.

It sure beats paying for shelfware.

Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.

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