What is The Key to Maximizing IT Labor Cost Optimization Efforts?

Business hand clicking cost reduction buttonMore and more companies are taking a second look at their IT supplier landscape in order to optimize their relationships from a cost, innovation, and efficiency standpoint.  Long-standing IT relationships often mature into highly predictable, low-risk service and support environments, that if left unchecked, drift along for several years without any meaningful innovation and efficiency gains.  The delivery models that used to “work” may not be optimal in the context of your current needs and innovation improvements and efficiency opportunities that could lead to significant cost savings are often not realized. In addition, when you overlay a market assessment of the rates and commercial terms on top of the innovation and efficiency opportunities for some of these long-standing IT relationships, the degree of staleness gets even worse. In fact, in the majority of our recent IT labor sourcing optimization engagements, the rates and commercial terms assessed were found to be suboptimized when compared to current market conditions.

In our experience, regardless of the length and depth of your IT supplier relationships, there are multiple levers that can be pulled in order to optimize your relationships and overall labor spend. The number of levers available to pull will vary based upon each company’s approach to labor sourcing. Whatever the number of levers available, UpperEdge recommends you determine the impact and understand the risk associated with each lever before engaging any of your suppliers in optimization discussions.

Here’s how:

Conduct a detailed baseline assessment of your supplier relationships.

Relationship: Assess the level and health of your relationship with each of your key suppliers, both at the account and executive level. In addition, we recommend assessing the level of familiarity of each key supplier with your organizational environment and their approach to delivering value, innovations, and efficiency gains.

Commercials: Conduct a mark-to-market assessment of your commercial construct with each key supplier in order to identify improvement opportunities. More specifically, a comprehensive resource rate assessment should be conducted to identify rate reduction opportunities based upon the domain, role, and location of your external resources. In addition, we recommend assessing the level of price protection and business flexibility included within your existing contracts as those can significantly impact the value received. Examples include items such as rate locks and caps, benchmarking, ticket workload variance, and minor enhancement flexibility to name a few.

Performance: Conduct a mark-to-market assessment of your existing service levels and key performance indicators, inclusive of a detailed staffing and productivity analysis such that you can determine if the service and delivery model includes resource bloat. Optimization opportunities must be balanced against the level of and quality of services required.

Capability: Conduct a capability assessment of your existing supplier base in the context of your company’s existing and future requirements. If capability gaps are identified, UpperEdge recommends an evaluation of the market for additional suppliers across the relevant service and application categories in order to close any capability gaps and maximize sourcing and negotiation leverage.

Determine the Value of Each Lever and Understand the Risk of Implementation.

The baseline assessment will help you identify your available pool of cost reduction levers. Using relevant and precise market intelligence, you can then develop a high-confidence estimate of the opportunity available for each lever. Applying a structured risk analysis of each of the levers will provide you with the implementation roadmap for the highest payback levers. Although the applicability, degree, and impact of the following levers may vary for each company, we’ve summarized some of the more common levers used in our engagements to capture IT labor sourcing optimization opportunities:

Resource rate reductions: Renegotiating your rate cards based upon the findings of the resource rate market assessment is a common approach to reducing costs. Renegotiations with incumbent suppliers can be very complex. The level of success in realizing the market validated rates is directly linked to the effectiveness of your supplier conditioning and negotiation strategy.

Supplier resource sourcing: Shifting non-strategic onshore resources to lower cost nearshore or offshore locations is a lever that can generate significant savings. Assessing the impact of such a resource sourcing strategy on service levels will be critical in order to identify lower risk roles that can be shifted without impacting the continuity of service delivery.

Efficiency and Productivity Improvements: The staffing analysis conducted during our engagements often reveals opportunities to reduce the staffing counts associated with long-standing support services where limited refreshes of the delivery model have occurred. Suppliers today are bringing more automation and innovation into their delivery models and it is important to engage your suppliers on a regular basis so your company can benefit from these value added improvements.

Internal Labor Shift: Most companies have used labor arbitrage as an effective approach for minimizing IT costs. Even though this has been well utilized in the market, there are still plenty of companies that have let their internal IT resource pyramid go unchecked which has added significantly to IT labor costs. Conducting a refresh on these very highly paid internal resources is a prudent exercise and can result in significant cost savings if you determine that some of these roles can be sourced from nearshore or global delivery locations.

Supplier Share Shift or Consolidation: The consolidation of your supplier base, where appropriate, will not only allow for a simplified and more efficient contractual process, it will also increase your leverage when negotiating with your key suppliers. Supplier rationalization and consolidation often comes with new business opportunities; which when supported by the appropriate negotiation strategy, will go a long way in refreshing your base contract and achieving more favorable rates and commercial terms.

The various levers described above should be assessed in the context of savings opportunity value, feasibility, company culture, time to achieve, and risk of implementation. They key to successfully conducting and executing on IT labor cost optimization initiatives lies in the approach. Companies must use a proactive, systematic, and data-driven approach. Obtaining a holistic view of your existing key IT supplier relationships approximately every 12-18 months should be a major component of your supplier relationship management program.

We welcome your comments and feedback. In addition, if you would like more information about how UpperEdge can help you with your IT sourcing, negotiation, or project governance initiatives, please do not hesitate to contact me at [email protected] .


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