CIOs discover problems with recessionary cost-cutting outsource deals

Many CIOs signed outsource deals in the recession to cut costs, but 43% of the deals were not structured properly and do not meet business needs

Over half of CIOs signed IT outsourcing agreements during the recession to cut costs, but 43% of these are now causing problems because they were not structured properly and do not meet the needs of businesses.

The research from outsourcing consultancy Alsbridge reveals the opinions of 250 IT decision makers in the UK, Switzerland, Holland and the Nordics.

“A disproportionate focus on cost is likely to leave you with a contract that is badly structured and doesn't meet your company's needs,” said John Sheridan, head of ITO at Alsbridge.

A substantial 84% of the respondents chose to outsource to drive down costs. But Alsbridge data showed prices had dropped by over 25% since most of those contracts were signed. The biggest average drop in prices were in services around storage, where there was an average drop of 56%; in telecoms (43%); servers (23%); and mainframes (20%).

“Cost-cutting is still high on the agenda as businesses continue to rein in budgets and market rates fall,” said Sheridan. 

Pricing paradox

“This leaves IT leaders in a pricing paradox, where they need to cut costs but a disproportionate focus on this in the past has landed them in trouble.”

CIOs must balance their negotiations with 42% claiming that, if cost reduction is the only motive for renegotiation, it rarely results in success.

The challenge for IT leaders now is to balance their cost-cutting motives with their company’s long-term business and technology needs.

“IT leaders must use market data to understand what's fair at the level of value they want returned, and have a reasoned discussion with their supplier based on clear objectives,” said Sheridan.

Renegotiation tactics

Yan L’Huillier, global CIO at inter-dealer broker Tradition, told Computer Weekly he was going to his suppliers and asking for cost reductions in return for longer-term commitment.

"We are going to a lot of our vendors and saying 'Look the world is changing and we all need to be in business' so we want the same service at a lower cost," he said.

L’Huillier said most of the Tradition's suppliers react positively to this and some are willing to reduce costs for a longer term relationship.

Robert Morgan, director at sourcing consultancy Burnt-Oak Partners, said businesses are always trying to get suppliers to lower their prices, but they have more of a case today. He said it is not unusual for discounts of 15% to be offered.

But Morgan said it is not the case suppliers are losing out, because many of the discounts are requested a few years into a deal when the supplier margins are high.

He said there are lots of ways businesses can cut IT costs if they properly understand their estate. 

"I know big businesses that make thousands of people redundant to save money and don't realize they can sometimes save millions just by ending software licenses they don't use," said Morgan.

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