Annual reviews will help a UK manufacturer cut a fifth of its IT spend this year
The benefit of regularly evaluating IT contracts has been highlighted by a UK manufacturing firm that reckons its contract management programme will reduce its IT spend by 20%, about £300,000, by year end with further savings anticipated.
Radiator and boiler maker Caradon Plumbing began re-evaluating its IT-related contracts and centralising them in a Lotus Notes database in the IT department at the beginning of the year.
The project was the brainchild of Chris Jessop, head of technical projects at Caradon, who says that previously the company had no idea about the number, nature or value of its contracts. A key problem was that they were held by different departments and some were not included in the IT budget. Gaining an overview was crucial.
The company has identified 200 contracts and aims to halve this by year-end, weeding out poor value contracts and renegotiating better deals for the remainder. Jessop says the key to renegotiating contracts is having good information about contracts and when they are up for review. Caradon has also created a new process whereby any new contracts have to be added to the database before they are approved. A key aim is to keep contracts short - preferably one year - so the company can renegotiate them sooner.
"The market is moving so aggressively that a good deal now might not look so good in 12 months' time," he says.
Caradon's improved transparency highlighted some areas where major savings could be made. It has renegotiated its mobile phone contracts which will reduce its mobile fees by 40% - a saving of about £88,000 - over the year. The company plans to replace some of its leased lines with internet protocol virtual private networks to further reduce its IT spend and will review its landline carriers.
The firm's renegotiated contract with its maintenance supplier has cut its annual PC hardware maintenance costs from £70,000 - Jessop calculated that this equated to about £800 each time it phoned the supplier - to £20,000, a saving of £50,000.
Quick wins for cutting IT spend are hard to come by and the value of effective contract management should not be underestimated. It can also boost the credibility of the IT department within the business.
"This exercise not only gives us a real picture of the cost of IT, it ensures we have confident, accurate information on our current contract commitments and is driving down the cost of IT to the business," says Jessop. "It builds trust and will add credibility to my role and gives me a better standing within the organisation. Going forward I will also have more chance of getting funding from the board."
How Caradon made the savings from renegotiating its standard contracts
PC hardware maintenance was costing Caradon £70,000 a year. It worked out this equated to about £800 a call, often more expensive than replacing the affected equipment. The contract it renegotiated has reduced this figure to £20,000
A new contract for handling mobile phone calls will reduce fees by 40%, about £88,000, over the year
Support costs for its computer-aided engineering system hardware have dropped by 30%
Its renegotiated maintenance agreement for its private branch exchange telecoms network gives better service and is 10% cheaper.
Tips for better contract management
Document everything and store all contract information in a central accessible place
Re-evaluate, re-evaluate and re-evaluate again - can you be certain that all of your IT-related contracts are delivering value for money?
Keep the lifetimes of contracts short so you can review and renegotiate them regularly
Keep track of when contracts are coming up for renewal to ensure the company has a stronger negotiating position
Try to cut down on the number of suppliers you deal with, without putting all your eggs in one basket
Find your main pain points, such as telecoms, and look for alternative suppliers
Don't stop at the contracts - try to negotiate more favourable service level agreements at the same time