As IT executives, we are all too familiar with the constant cost pressure and the tactical measures required to manage IT operational budgets. The focus tends to be on lights-on operational expenses and areas like resources, procurement, travel and project investments become the targets for reductions. If this is the focus you miss a great opportunity to mine for real savings and improve IT performance.
These target reductions tend to be short-term focused and are intended to affect end-of-quarter cost objectives. An area that can have a significant impact on IT operational cost is your services contract portfolio. Although longer-term focused, conducting an assessment and evaluating the structure, terms and performance of your contract portfolio could uncover substantial cost reduction opportunities.
There is constant “churn” with suppliers, agreements and scope of services. The dynamic nature of managing the stream of external service demand can lead to inefficiencies that equate to increased IT costs.
The challenge in managing a dynamic, evolving supplier contract portfolio is compounded by trying to maintain consistent process discipline when there are several contributors participating in the sourcing process.
With this challenge comes an opportunity. The opportunity to analyze the contract portfolio and mine for cost reductions. These opportunities could come from several areas:
1. Consolidation – leverage price reductions by increasing volume to suppliers who provide the most value.
2. Re-bid – avoid the path of least resistance to renew contracts when they come to term. Reestablish requirements and go-to-market to improve service value.
3. Contract audits – review active contracts for need, terms, scope, performance and consumption to identify unnecessary spend.
4. Benchmarking – compare current pricing against market pricing to identify price adjustments opportunities.
5. Contract and service structure – there are several areas that could improve cost control when developing your next service contract: consumption-based billing, factoring in demand drivers, no penalty termination, shorter-term agreements, business objective alignment based on outcomes, service level agreements with service termination and service provider flexibility to name a few.
Consider taking two steps of action:
1. Conduct an assessment of the contract portfolio to identify “low hanging fruit” opportunities. Build a plan, drive to completion and harvest savings.
2. Commit to establishing or improving your vendor management function, building organizational capabilities and establishing a set of polices, standards and processes that will provide a process framework for managing the lifecycle of supplier contracts in a consistent manner.
Following these actions will not only increase IT performance, but deliver cost reductions. A well-established vendor management organizational (VMO) practice can be self-funding and provide significant value to the organization. Active contract portfolio management combined with establishing standard processes will support VMO funding by way of cost savings and cost avoidance.