The Government has asked its IT suppliers to cut costs. No figures have been officially announced but industry sources think the expected cuts will be 20% immediately and 40% over a number of years.
Everybody is asking how?
Well Robert Morgan, director at consultancy Burnt-Oak Partners, has agreed to give us the benefit of his experience on both the customer and supplier sides with a 10 point guide to making a 20% reduction in the cost of IT contracts.
Burnt-Oak Partners is an independent outsourcing,finance and M&A advisory specialising in securing sustainable strategic outsourcing. Its personnel have an average 15 years of outsourcing experience both as suppliers and as end-clients.
Robert is happy to answer questions directly by emailing him at [email protected] or through the blog if you leave a comment.
To start with Morgan says all clients of IT services that want to cut costs should:
– Review original logic & minimum requirements you, the client imposed at the start of the contract.
– Question every element as to value to the business today and tomorrow.
– Understand and possibly model the transaction from each vendor’s point of view. Each vendor faces different cash, accounting and sales pressures. Having a targeted strategy for each contract and each vendor is, in our opinion, fundamental.
His ten hints for cutting costs are:
1. Contractual Flexibility – envisaged levels of flexibility are mostly never required, however allowances will have been built into the commercial (holding a price even if volumes decrease); service (exceeding peak traffic predictions without penalty fees) and business (“free consultancy” within limits) elements. Formally agreeing to moderate or remove the agreed flex should show savings. We would suggest that creating a gap analysis between the original contract and the current situation would help in identifying opportunities for adjustments.
2. Power User requirements – Key business heads or departments (CFO or Commodity Dealing desks) are usually overly protected to ensure their buy-in and agreement to an outsourcing deal. Assurances here will have cost a lot of money – reviewing these demanding environments usually shows less than half of the contingencies are actually needed. Savings can be made by easing the delivery model into a more standardised form. At the same time the notion of Power User may have “leaked” and surrounding users or departments managed to be upgraded at high cost but without real need. With the effect of time the vendor allegiance to customer satisfaction can act against fiscal responsibility.
3. SLA and KPI review – What parts of the business could downgrade their service levels and still function adequately? What SLA’s am I paying the most for and why? Often significant savings can be achieved by downgrading. The notion here is rightsizing the demand. It is our experience that showing an openness to improving a small number of service levels while this process is taking place will unlock collaboration while only focusing mainly on cuts creates position bargaining and yields less cost savings.
4. Deployed Personnel – Are all the people focused and full-time on your projects? Under-deployed people are often occupied with other client work if your business is sub-optimal. If this becomes a regular occurrence significant and permanent savings are possible. Pay special attention to travel; true availability; and starts and stops which are inefficient and costly.
5. Redundant Applications – Suppliers track the usage and maintenance of all systems and can easily identify obsolete and little used systems which can be closed off . We would recommend a systematic review of ALL applications to determine the degree of complexity and obsolescence. In our opinion reducing complexity should become a specific target whether support is outsourced or not. In parallel there should be an immediate and focus on automation of repetitive tasks with human activities.
6. Integration versus running systems into the ground – you may find in reviewing the logic and strategy again that stopping a cross-platform project and merely running the system into the ground is cheaper. But there must also be a clear strategy to decommission applications once they get close to the ground. Too many situations involve humans preventing a natural decay of a technology or a process just to protect jobs or maintain comfort levels.
7. Refinancing – Large-scale transformation projects and large asset purchases can be successfully refinanced at far cheaper rates than say three years ago. Here again analysing the situation from the outside in is critical in order to estimate the amount of reasonable “give” the British government can reasonable request.
8. Is there a case for Shared Services – consolidating into a giant bureau service will save mega money and can also lead to a strategy of restructuring large segments of services. Using call centres as an example this strategy would bring together a process of efficiency coupled with a possible element of privatisation (either up front or gradual) and allow the government to extract very significant immediate financial benefits and, if partners are well chosen, long term benefits in cost and service while potentially bringing back to the UK a certain number of call centre jobs that have migrated offshore.
9. Wage arbitrage – make better use of nearshore and offshore resources – 40-50% savings are possible on what is usually the largest single cost component – people. We would recommend that this strategy be followed systematically for function’s earmarked to be automated within 2 to 5 years.
10. Pressurise the service provider – they know where the high costs exist and why they cost so much. Accept that the answers might be hard but real money can be saved. Using a qualified, expert and independent mediator dedicated to contract would provide on-going governance improvements.