IT’s mandate: cut costs. Again.
If you’re in business, you can blame the economic downturn. If you work in government, you can blame the Gershon Report. Those who work for newspapers or the music industry can blame the Internet for crash-tackling their business model. But whatever the reason you’re feeling the squeeze, the pressure on CIOs to cut costs and improve efficiency in IT is a challenge that is not going away any time soon.
Getting the business and IT outcomes you expect from your outsourcing partnerships, is never easy, but the current economic situation has put additional pressures on CIOs to drive down the cost of outsourced services
In this day and age, when so much IT is outsourced to service providers, wringing every drop of savings from your vendor is critical. It can be a tough conversation to have and one that’s often difficult for CIOs to initiate. What’s more, how do you progress from that conversation to a well-crafted agreement, one that that lets you scale up your IT needs when business is good and roll them back when times are bad?
Getting the business and IT outcomes you expect from your outsourcing partnerships, is never easy, but the current economic situation has put additional pressures on organisations to drive down the total cost of outsourced services, while still achieving the expected benefits. In fact, Gartner has indicated that through 2012 “an excessive focus on cost reduction will cause inflexibility that will disrupt business in 30 percent of outsourcing deals”. According to the Gartner research, “a well-executed sourcing strategy is more important during tough times than ever before, because it can help to avoid some key outsourcing problems”.
Tony Henshaw, vice president and general manager global outsourcing and infrastructure services, for Unisys in the Asia Pacific, is very familiar with the disruption being caused because he’s been hearing about it from Unisys’ outsourcing customers since the global financial crisis arose a year ago.
Henshaw divides these customers into two camps: “The first I describe as the ‘knee jerk reaction’,” he says. “They say, ‘We need you to cut your costs by 20 percent. Next invoice you give us we’ll cut it to 80 percent of what you said and then we’ll move along’. Generally that’s a cry for help -- at least we interpret it that way.”
“The more mature reaction is one that says: lets talk about it, what we can do together to reduce costs for both us?,” Henshaw says. “The next level of maturity is where they’re looking for flexibility from us -- they’re looking for a dialogue and a conversation about what might be possible.”
“You can benchmark to reset pricing, but at the end of the day, benchmarking is an adversarial process -- one party wants to do it and the other doesn’t,” says Arno Franz, partner and regional president at sourcing advisory firm TPI Asia Pacific. “Benchmarking is a way to open the door to reassessing the entire relationship, but you have to go into it with your eyes open, because one party is often a reluctant bride.”
Franz says too many outsourcing providers tend to look at each client situation on a transaction-by-transaction basis. “It’s natural they would do that,” Franz says, “but at the same time, you as a client want to see if there are efficiencies or utilities that can be created, because they’re not going to go into that willingly.”
Franz says CIOs and their boards must ask themselves: What type of relationship are we looking for with our provider? Is it a partnership arrangement? Or do we have an experienced team inhouse? “You need to understand what your trade-offs are going to be in terms of driving some of these efficiencies, and getting current market pricing is key,” Franz says.
“You’ve got to decide: am I going to restructure my existing arrangements, or am I going to go down the recompete path? Both of these have different implications in terms of timing and realisation of benefits.”
Restructure or Recompete?
CIOs who opt to follow the “restructure” path will either end up with a new contract with their current service provider or will modify the existing contract -- it’s a pretty straightforward proposition. “Theoretically, if you’ve had strong governance in place you should already have a good feel for what those levers are, and you should already know what things you’d like to change in your existing contract -- whether it be services, pricing, scope of services, etc -- in order to be able to restructure for your benefit,” Franz says.
Going down the recompete path, however, involves a lot more decision-making and a lot more re-alignment with the business. As a CIO, you’ll be faced with questions like: Single vendor or best-of-breed? Sole source or competitive bid?
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