Existing Service Providers – What’s Your Cost of Incumbency?

It’s inevitable.  Every year new targets are set to reduce OPEX (OPerational EXpenses). Whether you’re the one responsible for setting the targets or accountable for achieving them, you’re constantly searching for and attempting to identify ways to meet and often exceed these targets.

If you’re like most companies we advise, you’re already focused on quantifying the next round of savings initiatives you’re willing to commit to and you’re beginning to identify where and how you’ll realize those savings.  You may have even found some success in prior years in looking for savings with your existing services providers.

Having quantified the savings in these areas, you may still be short of meeting your next round of reduction targets.

• Are the services savings you’ve identified achievable?
• Are they too aggressive or not aggressive enough?
• Are there still more opportunities within your services portfolio that can contribute to your reduction targets?
• What is your true cost of incumbency?

Answering these questions often requires an in-depth view of your vendor contracts, usage, demand and market intelligence.

So how can you confirm your approach is on-target and identify additional opportunities to help you meet your OPEX reductions?

Baseline Your Vendor Relationships

Companies often find one-time success targeting a select set of vendors and the related spend to negotiate savings to meet a given year’s target reduction commitments, but those often provide just one-time benefits. They can be offset as early as the next budget cycle with corresponding increases that do no more than kick the can down the road.

UpperEdge’s IT Services practice works with its clients to instead baseline their entire IT services portfolio of external vendors.  In doing so, they gain insights into the mix of labor by skillset as well as vendor penetration by business unit.  Key insights a client receives from a baseline assessment include:

• Consolidated View of 3^rd Party Labor by Skillset (Internal vs. External)

  • Aligning these findings to business objectives can be an insightful exercise that either affirms or empowers correction to internal and external resource investments.

• Analysis of Vendor Penetration by Business Unit, Technology and Cost

  • Analyzing where your vendors have and have not penetrated your business empowers you with key insights into vendor segmentation, vendor redundancy and vendor consolidation opportunities.

• Evaluation of Master Agreement Terms to Market

  • Master Agreement contract baseline assessments of key terms, gaps and mark to market analysis confirms areas of strength and exposes areas of weakness in vendor relationships (both operationally and financially) that, if addressed, can provide qualitative improvements in service and quantitative reductions in costs.

• Aggregating Demand

  • Inventorying your labor needs for 3^rd party services is often a topside “how much will you budget for consulting labor” exercise sufficient to submit your project and admin budget numbers. Aligning those 3rd party labor dollars to vendor projections of spend quantifies the opportunities you can leverage with your vendor base.

• Mark to Market Rate Assessment

  • Benchmarking your 3^rd party services providers empowers you with market data on current rates which, when coupled with your current spend and forecasted demand, will quantify savings opportunities.

Leverage Your Baseline Results

Empowered with the outputs of a baseline assessment of your services vendors, one or more of these levers and reduction opportunities will present themselves.  UpperEdge has seen the following levers and resulting savings opportunities in their client engagements:

• Vendor Consolidation / Tiering

  • Companies can achieve 8-12% savings by moving spend from boutique / localized vendors to enterprise vendors.

• Agreement Renewals

  • Re-committing to existing vendors by adding a year(s) to an existing agreement can net companies cost-avoidance to COLA adjustments with savings of 3-6% and drive 3-5% reductions in rates for existing services

• Packaging Demand

  • Above moving spend from boutiques and localized vendors to your enterprise vendor base, sharing a view of forecasted demand for budgeted projects / initiatives can net further concessions in rates, discounts or rebates netting 6-8% reductions in costs

• Rate Card Reductions

  • UpperEdge’s mark to market benchmarking of vendor rates drive average savings opportunities with our clients of 3-12%.

Achieving and even exceeding your OPEX reduction targets can be accomplished in most cases without this level of rigor if you need to hit certain targets for a year, but to do this year over year with sustainable results is generally not possible.  Investing the energy and resources to truly baseline your services portfolio to understand, refresh and maintain it will allow you to identify and assess the opportunities that exist. These opportunities will inform your negotiation strategies with your vendors and empower your teams throughout the negotiation process to realize the savings and OPEX reductions for your organization.

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