Can't Say It Enough: Don't Let Cost Overtake Other Outsourcing Objectives

Ann All

I always hate to harp on a point, even an important one. But that's what I am going to do in this blog. So if you're the type who never liked hearing from mom that you should eat your vegetables, you may want to move on.

 

Thanks to aggressive contract negotiations, UK companies are getting price concessions of up to 23 percent from their outsourcing suppliers, according to a recent Compass Management Consultancy study. Yet that's not necessarily a good thing. A silicon.com article quotes Geraldine Fox, the company's director of sourcing services:

We are seeing aggressive, high-level targets plucked from the air in contract negotiations which bear little relation to what the business needs. Asking for a 20 per cent cut across the board could be too much -- and drive a contract to failure.

As I just blogged earlier this month, citing my recent interview with Deloitte Consulting's Hobart Harris, emphasizing short-term cost savings over long-term process improvement leads to disappointment in many outsourcing initiatives.

 

Though a desire for competitive pricing is one of the main drivers behind the growing popularity of a multi-sourcing model, Harris says that many companies fail to take into account the costs and complexity of transferring services from one supplier to another.

 

Indeed, in their haste to pat themselves on the back for driving a hard bargain, many companies miss larger cost ramifications. Fox tells silicon.com that suppliers often manage to recoup early discounts over the life of an outsourcing contract. Also, she cautions, managers tend to treat outsourcing costs as discretionary spend, despite the fact that their suppliers may provide core services.

 


This IT Week article offers some good and pragmatic advice on renegotiating an outsourcing contract. Among the suggestions: Meet regularly with suppliers and use pre-determined metrics to discuss whether the desired goals are being attained. Ask for additional services at the same cost, rather than a lower price.



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