When it comes to IT spending, it’s never about how much an organization spends as a percent of revenue, it’s a matter of how and where those dollars are spent. In any given year, it is not uncommon for IT organizations to have sizeable expense reduction targets, however, these reduction targets are often overshadowed by daily service delivery and customer support objectives.
The economic realities we are currently faced with bring these reduction targets back to the forefront, transitioning them from targets to business imperatives. But rest assured the reductions are there if you know where to look.
Third-Party SAP Basis and Managed Hosting Rates are Falling
I have had the pleasure of supporting many clients with their Third-Party SAP Basis and managed hosting negotiations over the past year and consistently these clients are seeing a 20% – 30% reduction in fees from their incumbent provider when executing an RFP, and over 40% (including migration fees) if the organization is willing to change providers.
This raises some serious questions:
- How long have these reductions existed?
- How long have these vendors provided these opportunities to the market?
- When were they planning to offer these to their existing customers?
- Why did it require an RFP for them to be made available?
The answers are not nearly as important as the fact that these opportunities exist. There are six ways IT leaders can secure these benefits:
1. Exercise Your Benchmarking Clauses
Most organizations have the ability to benchmark their provider’s rates, SLAs, etc., within their managed services and telecom agreements. But far too often these provisions are never leveraged to the client’s benefit. Organizations should benchmark their deals at least every two years to ensure any market variances can be captured during the term instead of at renewal.
2. Evaluate Your Service and Support Volumes
Your SAP Basis and managed hosting agreement likely leverages a fixed fee for a volume of service with an upper and lower threshold on service volumes, often referred to as a “Deadband.” Typically, the fixed fees are based on several Billable Resource Units and associated volumes: # of virtual machines; # of system IDs (PRD, NON-PRD, DR), etc. Should the volumes within one of these Billable Resource Units fall below the established Deadband, you may be due a fee reduction or credit.
Your vendor will certainly be measuring these, and it is important for you to independently measure them as well.
3. Review Support Model and Service Levels
When an organization first engages a vendor, it is not uncommon for them to seek the highest level of support from the vendor to minimize their internal risk, contracting the vendor’s Platinum support options with a number of onshore/onsite resources. This level of support does not come without cost.
There is no better time than the present to re-align your support model and service levels to the actual needs of your business and get an expense reduction in the process.
Don’t stop at your managed SAP Basis and hosting relationships. Look at your software and hardware maintenance agreements as well. Ask yourself how many times you have called the vendor support or leveraged the updates? It’s entirely possible that a lower tier of service or even a T&M model might be appropriate for the time being.
4. Repurpose Value-Adds in Favor of Line Item Rate Reductions or Invoice Credits
Many times, savvy IT organizations will negotiate a suite of relationship-level value adds, in consideration of longer-term or sizeable relationships. These often include a pool of free consulting hours the customer may leverage on an annual basis. These hours are typically reserved for net new or unplanned projects, allowing IT leaders to maximize their annual budget.
If your Third-Party SAP managed services relationship includes something similar, seek to trade these value-adds in for line item rate reductions or invoice credits. The vendor must carry these obligations on their P&L, anyway, so you might as well take advantage of them where they are most needed.
5. Negotiate an Early Renewal: Leverage the Vendor’s Annual Booking’s Target to Create a Win/Win for Both Organizations
Each year vendors establish their revenue targets based on projected sales pipelines for new and existing customers. Every sales executive is then measured and compensated on their ability to meet these sales targets. In the professional and managed services arena, these revenue targets are translated to “bookings” or the total value of the deal. As in most cases, vendors are unable to recognize the revenue from these deals until the services are rendered.
In normal times, understanding and closely monitoring your strategic vendor’s sales pipelines and bookings targets is an important way to optimize the value of your relationship. In times of economic uncertainty, it is a must.
The likelihood your SAP managed services provider will meet their revenue and bookings goals in 2020 is highly unlikely as many customers are putting their SAP implementations and hosting transformations on-hold.
Negotiate an early renewal. If you are reasonably satisfied with your provider’s performance, consider negotiating an early renewal to create a win/win for you and your provider. This approach serves to fill a large hole in their bookings target for the year and should secure you a much-needed expense reduction now and in the future.
6. Release an RFP
If you have the capacity and willingness to release an RFP, DO IT. Do not let the current economic uncertainty stand in the way of bettering your position. The various providers are going to be extremely hungry for your business if you give them a reason to be — not to mention your incumbent is going to be incented to not lose your business. For them, it’s reduced costs or risk seeing their revenue from the current services going to $0. This is a proposition they cannot afford.
With this approach it will be important that you convey your seriousness to avoid the providers from just going through motions.
If you choose to stay with your incumbent provider, as a final measure, request a sign-on bonus equal to the previous market variance as a condition for selection.
While the above measures are recommended in a normal year, they are for more important now. Whether executed individually or collectively, take advantage of these expense reduction measures to capture immediate and long-term financial benefits for your organization.