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How to get a better outsourcing deal

Bart Perkins | April 29, 2015
The trick is to recognize how IT outsourcers reduce costs and then find ways to share in those savings

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.

 

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