Outsourcing: cost reduction in an economic slowdown

With the dust from the credit crunch yet to settle, and real signs of tighter economic conditions ahead, most companies will be looking to rein in their spending in 2008.

With the dust from the credit crunch yet to settle, and real signs of tighter economic conditions ahead, most companies will be looking to rein in their spending in 2008. As previous articles in Computer Weekly have observed, companies are likely to focus on running their IT departments more efficiently as one way of improving overall profitability, writes Rex Parry, head of outsourcing at Eversheds LLP.

For some, that might mean a new outsourcing strategy, perhaps with an offshore element to benefit from the lower unit costs available in countries with a cheaper cost base.

For companies that have already outsourced a large part of their IT needs, a slowing economy will mean careful management of their outsourcing arrangements becomes even more important. Customers will also want to review their existing outsourcing arrangements to identify ways they can reduce price or obtain better value for money. Customers could consider the following:

- If the contract allows for early termination, the customer might find it cheaper in the long term to terminate their existing arrangement and re-tender the services at a lower cost. Even if the customer does not want to exit, it might be able to use the threat of termination to renegotiate the pricing arrangement.

- Even if the contract does not contain a break clause, the customer might find offering to commit to a longer contract term will encourage the supplier to reduce charges.

- Often contracts will contain mechanisms that allow the customer to push the price lower, usually through benchmarking. As a general rule, technology costs decrease over time. A benchmarking exercise allows a customer to ensure the competitiveness of the price it is paying. If a customer has not recently benchmarked its contract price against the market, then now could be a good time to do so.

Any well-drafted outsourcing contract will contain a detailed change-control procedure which should require the supplier to accommodate changes requested by the customer. With the primary focus now on reducing cost, a company might find that it would rather take a lower standard of service in return for a reduction in price or the scope of the services provided. In each case, the change-control procedure should allow the customer to drive a price reduction.

If the customer has been experiencing service problems, one option is to exploit those failures to drive a price reduction. Alternatively, if things are particularly bad, the customer might consider other legal remedies (such as court action) to recover any losses resulting from the service problems.

The emphasis in the coming months for those who manage outsourcing relationships will be to drive down cost and ensure their house is in order if legal disputes are likely. The better news for suppliers is that some customers may prefer to use the levers identified in this article to drive innovation or better services instead of lowering the contract price.

Read more on IT supplier relationship management

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