IT Efficiency Best Practices: Third Party Savings

As I have previously noted, cost reduction is ever present in today’s economic climate. And that includes IT. But, it is worthwhile to note, that during this ‘jobless’ recovery, businesses are investing in IT and other infrastructure to boost productivity and reduce costs. Thus, IT is one of the few areas where investment is occurring (versus hiring more staff elsewhere in the business, or plant or real estate investments). While you may have some investment increase coming in, what are the near term tactics that you should employ to deliver the required cost reductions and efficiencies? And make sure you understand the business drivers behind the cost reduction so you can appropriately shape your program to meet those needs (e.g., are there critical business profit goals that must be met or are you looking to achieve savings for reinvestment, or something else).

Assuming you have that understanding, where do you start? I recommend 5 near term areas that should provide real savings and also tighten up your organization to make it a leaner and more effective shop. The first area to tackle is what you spend on vendors and services or third party spend. In order to address this area you must understand the details and trends behind your third party (3P) spend. This can be anywhere from 30 to 70% of an IT shop’s total budget. And, unfortunately it is often not well-leveraged. Use your finance and procurement team to get the spend facts and trends. And then engage your team to ensure they understand that you will be driving a new level of leverage from this area. The first rule with any vendor is: they must deliver to the same high standards you hold for yourself and your team. And the second rule is: partner effectively together. How do you get savings in this area? Start by calling the every significant vendor in and explain to them the pressures facing you and your company and that you need their ideas on how to cut costs. If they are any good, they have been waiting for this call. If they are really good, they have proposals at the ready. Remember they will suggest that you must give them more revenue to save you money. While there may be a great idea buried in that sales pitch, avoid the suggestion and ask them to save you significant monies on your current costs and their current revenues. Tell them every area of your budget is getting reduced and they must contribute. Assign strong members from your team to each vendor, partnered with your procurement organization and review and track every savings proposal. Assign the vendors appropriate challenges — do they provide contractors? how about a 10% per hour rate cut? Many of the big banks have already done this (and perhaps 15 or 20%). Look to reduce the maintenance fees, identify unused licenses and return them for refund or maintenance reduction, negotiate for bigger discounts for anything you buy. Eliminate distributors and middlemen where ever possible. Use a procurement benchmarking service to ensure you are getting a good discount. Make every purchase a level playing field with competition. Make sure you personally review every major 3P contract and new deal — and when you do, ensure it is up to a high standard. Ensure your team understands these new principles. You should be spending your company’s money as if it is your own.

Is your team using consulting services? or expensive senior level contractors? These may be required for specific critical efforts or tasks but they should all have a turnover period where critical work is handled by your team, not the consultants. Figure out how to eliminate or dramatically reduce these third party expenses. The same goes for expensive contractors. It will be tough to keep up your team’s morale when you are reducing staff and yet you have lots of expensive contractors in your shop. Figure out how to transition the work to your team at much lower cost and improved control.

Track all of your cost reduction initiatives, vendor by vendor, task by task. Assign your finance lead and procurement lead to track these for you and ensure results. Have one of your most senior staff be responsible for the 3P reductions broadly — this also helps uncover areas where vendor relations may be too cosy. These actions will get you started on the 3P costs and should save you 10 to 20% of your 3P costs. I will cover other near term tactics in the next post that should yield a significant near term gain, typically 2% to 5% quick hit savings.

As I mentioned, it is a tough economic climate out there, make sure that you are holding the vendors to the same standards to which you are holding your shop. And make sure you listen when they come back with ways that if you change processes in your shop, can save them time and rework which they can pass back to you in the form of lower costs.

I would very much like to hear if you have implemented such an approach with your suppliers and how it went. Please check out the other efficiency reference pages with more near term actions for a complete approach.

Best, Jim

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