Firms save more by cutting supplier costs than by laying off staff, says research

CIOs reluctant to challenge IT service providers to cut costs because multi-sourced IT ecosystems are too delicate to tamper with

CIOs are reluctant to challenge IT service providers to cut costs because multi-sourced IT ecosystems are too delicate to tamper with and it is deemed easier to cut the cost of in-house IT.

But, according to the research from IT sourcing consultancy Alsbridge, the savings made through reducing the costs associated with suppliers are higher than those made by cutting internal staff.

The study of 2,000 organisations worldwide found that spending on outsourced companies, as a proportion of revenue, is increasing at 6% a year, while internal labour costs are falling by 8% every year. It found that a 1% reduction in supplier and non-labour spend increased profit before tax by 4.1%, while a 1% reduction in internal labour costs only added 0.7%.

Homan Haghighi, director at Alsbridge, said many organisations are looking in the wrong place for cost reductions. 

“While cutting in-house labour costs may be the right thing to do in some cases, supplier cost management has the potential to deliver better results for the enterprise in terms of reducing absolute spend, enhancing productivity and improving profit before tax,” said Haghighi.

As organisations increasingly outsource they virtualise themselves, according to the research. “This has resulted in a new level of complexity in contractual and governance arrangements. These changes have combined to make some multi-vendor environments appear too fragile to change to senior managers,” stated the report.

The research report claimed that organisations were entering into complex multi-sourcing contracts without matching multi-supplier governance and service integration and management (SIAM) capabilities in place. 

Haghighi said it was not uncommon for problems to arise when an incumbent service provider is unable or unwilling to pass on crucial knowledge to other suppliers in a new multi-vendor environment: “In some cases, we have seen bad behaviour when valued suppliers have been asked to collaborate, co-operate and play well with others in the supply chain”

Recent research of Global 2000 companies from Information Services Group (ISG) revealed the UK’s widespread use of multi-sourced IT outsourcing.

In the UK, 44% of outsourced functions are split five ways and only 6% of contracts are single-sourced. A total of 22% use the model where 80% of the work is with a single supplier and the remaining 20% divided up, said ISG.

The proportion of IT outsourced to third parties will only get bigger and more complex as new technologies, delivery models and suppliers come to market with technology to address business challenges, which means procurement departments must ensure their IT sourcing policies match business goals.

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