Downturns are an ideal time to revisit your sourcing contracts
Looking to minimise costs on your outsourcing deals? Lawyer Simon Briskman offers a few tips on how to do it.
As businesses fight to cut costs, analysts are continuing to predict growth in outsourcing. Yet outsourcing has never been just about cost. Outsourcing is about delivering long-term business advantage.
Can outsourcing strategies combine tactical cost-cutting with future-proofing for the recovery? This is hardly an academic question. Companies that lock in cheap deals today risk failing to realise long-term value as market conditions improve.
Here are a few pointers on how to land an outsourcing bargain.
Avoid barriers to transformation
Take commodity deals. Longer contracts usually offer better pricing. For instance, with telecoms, a good deal can reflect downward cost trends and strip out costs through consolidation and vendor management.
Price improvement has long been a key driver in the communications outsourcing market. Yet, in the longer term, VoIP, fixed/mobile convergence and other new technologies will transform this space entirely. New, integrated services will provide a different approach to service delivery and tariffs. Long term commitment in the telecoms space needs to reflect these trends and provide clear mechanisms for future change.
Even for technology and BPO deals, it is not difficult to anticipate significant change over the next three to five years, as cloud computing, new offshore destinations, better network security and other products transform the market. Accepting long term deals on the basis of cost alone can impose significant hurdles against future transformation including unacceptable exit and re-procurement costs.
Approaching these issues requires joined up thinking on long term, strategic transformation and what part your outsourcing provider will have in supporting you.
Always stare a gift horse in the mouth
If future-proofing can be tough to achieve, a potentially bigger problem is settling for average service provision in return for immediate savings. Vendors are offering improved pricing as contracts come up for renewal, allowing users to take out cost and avoid going to the market.
But of course the supplier who helped you transform your IT in 2005 might not provide the cheapest or most effective team to run your support in 2010. Likewise the team which has provided support for the last five years may not be the hungriest for improvement over the next five.
Even if your current service is great, can you ever tell if your vendor's price offering is truly competitive without market soundings? Your current vendor may have achieved a steady state allowing them to take out costs without major effort. While applying price pressure to your current set of vendors may well yield results in the current climate, going to market may reveal bigger cost savings are achievable and uncover innovative and transformational services.
Are you making the most of your strategy?
Many parameters beyond downward cost pressure, and even new technologies, affect the market. Vendor consolidation, multi-sourcing and right sourcing strategies should provide context to standalone tactical deals. These strategies require a holistic view of an organisation's outsourcing portfolio and indeed its outsourcing potential, examining the best mix of suppliers to support long term business objectives, deliver on quality of service and provide class-leading price advantage.
But what should you do if the tactical deal on the table is the only palatable option in the current climate? Well, it is possible to build in to tactical deals provision for longer term strategies. Simple points, such as future transfer of the vendor's contract to a lead outsourcing provider, can be included in contracts. More complex services might anticipate multi-party governance and service level provisions based around multi-vendor environments and end-to-end outcomes.
For deals which really do just bridge a gap and play no long term part in strategy, look for a quick and inexpensive exit and avoid long term dependency on the supplier. A little bit of forward thinking now may provide you with a framework to ensure tactical deals are not a barrier to future strategy.
These are just a few thoughts about how to achieve cost cutting regimes consistent with longer term strategy. Failing to do so may leave organisations locked into deals which cause a drag on performance when the upturn comes. Dealing with these issues now will allow organisations to emerge from the recession leaner, sharper and ready for change.
Simon Briskman is an outsourcing Partner at law firm Field Fisher Waterhouse LLP.