IT leaders can’t expect to have the upper hand in an outsourcing negotiation. Whether you’re negotiating the initial contract, an extension or a change order, the outsourcer normally has the advantage.
That’s because outsourcers are involved in just such negotiations all the time. They understand the internal cost structure and frequently negotiate for the same set of services using the same pricing mechanisms and contract. You might level the playing field a bit if your company is large enough to have a dedicated IT vendor management group, but you will still be at a disadvantage. Your vendor management group does indeed focus entirely on negotiating pricing, but it does it for everything from toner cartridges to complex outsourcing arrangements. Its focus is much more diffuse than that of the people on the other side of the table. And since pricing mechanisms, sales channels and service levels vary by outsourcer, it’s difficult to master the nuances of every vendor’s contract terms.
But one way to get the best outsourcing deal you can is to make it clear to the vendors that you understand how they make money. That sort of knowledge can position you to make intelligent decisions that can lower your costs by lowering the outsourcer’s costs.
So what are some of the cost-reducing techniques that outsourcers use? They include the following:
- Purchase aggregation. The large amount of products and services that outsourcers purchase in support of their clients allows them to obtain lower prices than all but the largest enterprises. Software manufacturers typically offer significant discounts on volume sales. Hardware manufacturers that are also outsourcers may reduce hardware prices to near cost when they want to close a particular deal. Outsourcers also benefit from aggregating supplies, shipping and other services. For example, companies that fix computer equipment in a repair depot obtain excellent freight rates based on the large amount of equipment that moves from the customer to the repair facility and back.
In addition to products and services, outsourcers hire architects, database analysts and other technical specialists, which they spread across multiple clients. While very large organizations can justify the cost of technical specialists, small and mid-tier organizations often struggle to match specialist capacity with demand.
Evaluate which products and services could benefit from volume pricing when deciding which tasks to outsource. Some organizations, particularly smaller ones, will find it beneficial to expand the outsourcing scope to take advantage of expensive but hard-to-find technical specialists.
- Internal efficiency. Outsourcers streamline internal processes and technology platforms wherever possible. Ruthless standardization reduces internal labor costs while making it easier to deliver consistent, high-quality service. Internal operations are typically based on industry-standard practices such as ITIL, ISO 27000, PMI’s certifications or virtualization. All are well understood by IT professionals, easily explained to executive management and supported by numerous tools.
Embracing the outsourcer’s practices and tools promotes efficiency in both the outsourcer and the client. If you are unwilling to adopt the outsourcer’s practices, you are unlikely to get all of the hoped-for benefits from outsourcing. Discuss process standardization before signing the contract. If your processes need revamping, work with the outsourcer to decide if it will be cheaper for you or the outsourcer to do the work. There is no point in redesigning your processes twice.
- Facility costs. Some outsourcers allocate insurance, taxes and other facility costs proportionally across current customers. This works well when the data center, service desk or repair center is operating at capacity but can result in higher costs when customers leave or contracts are completed.
Evaluate the cost of doing business in the area in which your services will be performed. Labor, power, land, and other costs vary widely. And be careful to limit pass-through cost increases during negotiations.
- Technical resource leverage. IT organizations require a variety of specialized skills such as architects, database analysts and network analysts. Technical tools required may include perimeter security, communications equipment and network discovery appliances. Very large organizations can justify the cost of both the staff and the tools. Small and mid-tier organizations, often struggle with both. Since most employees prefer full-time employment, demand for technical skills rarely matches the exact capacity of staff. As a result, technical specialists are frequently either overworked or searching for projects to avoid boredom. Similarly, even if specialized technical tools are available, they are often used infrequently or significantly below full capacity.
Outsourcers spread people and tools across multiple clients, better matching capacity to demand. In addition, since outsourcing is the business, technical staffers are offered more diverse career opportunities. Unless you are large enough to justify a deep technical bench, consider insourcing the design of your technical environment but outsourcing the day-to-day operation and maintenance of that environment.
- Salary arbitrage. Many outsourcers staff positions not requiring face-to-face interaction in low-cost parts of the world. Typically this works best with well-structured processes requiring interaction with other technical staff (e.g. CMM Level 4-5 or Service Desk Level 2-3 support.) It is minimally beneficial with less structured processes or when the outsourcer must communicate regularly with nontechnical staff. Before accepting support from a low-cost part of the world, make sure your processes are well structured and ascertain that no language, time zone or cultural differences will hinder performance.
Clearly, lowered cost is only one consideration in an outsourcing decision. But if you pursue outsourcing, you obviously want to negotiate the best price possible. Don’t mindlessly beat your outsourcers to lower their prices! Allow them to assume responsibility for parts of your operation that enable them to leverage their scale, expertise and cost structure. Doing so can ultimately reduce costs for both of you, and your outsourcer will be grateful for being able to negotiate win-win pricing. Don’t start your long-term relationship as adversaries; show from the beginning that you intend to be collaborative partners.
Bart Perkins is managing partner at Louisville, Ky.-based Leverage Partners Inc., which helps organizations invest well in IT. Contact him at BartPerkins@LeveragePartners.com.