How Technology Cost Leakage Can Rear Its Ugly Head

It is estimated that more than half of negotiated cost savings from technology-related services are ‘leaked’ after contracting.  Unrealized cost savings range from a poorly defined initial project scope, inadequate sourcing processes, human behavior, or failure to negotiate anticipated or typical changes in an organization.  With the velocity and breadth of technology accelerating in this digital age, there is a higher risk of cost leakage and business disruption from these and other factors.

Often companies feel held at ransom by their service providers as the cost or risks of change outweigh the savings — or worse, the company is put at risk.  Having an ERP implementation that costs 2X the expected budget or managing a company that stops shipping or taking orders for a week, are scenarios that are not so implausible.  Companies frequently use various methods to determine the scope of a program, ranging from internal workshops or leveraging their partner channels, to running Requests for Proposals (RFP’s). Ultimately, these processes help identify certain expected outcomes and key requirements.  But they are typically focused on the to-be state and often do not consider the peripheral activities that it will take to get them there.

Key peripheral activities include:

• Interim processes
• Legacy system impacts
• Staging of data

These activities are often owned by the organization and are not considered in the external vendor estimate.  Large programs have several deployments, and in-between each, an interim process is required to keep a process flowing until the remaining scope is deployed.  These interim process versions are often missed or underestimated and can be more complex than the end-state process.  This is due to translation and data structure differences which require more resources to create and execute in the project and within the business.  Data is also often underestimated as the degree of changing definitions, the extent of bad data, and process dependencies are often not well understood.

Another industry ‘faux pas’ when determining scope is the assumption that a company can consolidate to one “standard” process.  It is a leading practice to leverage out-of-the-box functionality, however many processes will require custom solutions to meet business requirements.  For example, the process of managing inventory across distinct types of locations may require different process versions to meet business needs; a simplified version (for small locations), a complex version (for large distribution centers) and a third-party version (for integration with a different Warehouse Management System, for example).

There are many challenges when it comes to sourcing technology services that might influence the outcome:

• The vendor could have a greater knowledge of the target solution/service than the client which creates a disadvantage
• The vendor’s recommendation(s) are often influenced to match their capabilities
• The vendor could answer questions in a narrow respect, to avoid a negative image of themselves

The outcome is that the purchased solution or service is either incomplete or there could have been less costly alternatives.

Human behavior creates a bias when budgeting as there is often low incentive by all major stakeholders to consider the reality of the size, complexity and scope of the program.   This disconnect could come in many flavors:

• Software vendor’s guidance could be influenced to be low cost since if it’s too high you will not purchase the software
• Sponsors generally expect the lowest possible cost
• Program leaders will target to achieve or exceed the best possible benchmark
• System integrators commonly will assume the best possible circumstances to drive down cost

Expectations typically lean toward the best possible scenario with little focus on the true range of a program or its genuine estimated cost.

It is inevitable that at some point a change of service or product will be required during a project, so to get everything right at the beginning could take more time than the program itself.   The challenge with change is that the customer loses their negotiation leverage, as they typically can’t anticipate the changes that they will require or they have limited data to understand the deal received through the contract negotiation process. Thus, new scope or removed scope may not come with the same performance factors or discounts, since these changes were not considered in the initial contract set up.

UpperEdge Project Execution Advisory Services

UpperEdge focuses on end-to-end lifecycle sourcing of any partnership or program to reduce cost leakage and business risk.  We help you avoid risk associated with investing in technology sourcing capabilities, applying rigor to the sourcing process, collecting data market intelligence, and investing in product and service knowledge.  UpperEdge’s Project Execution Advisory Services will help your organization reduce cost leakage from your business, digital and technology transformations.

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