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Controlling the cost of IT

All businesses are under pressure to reduce their costs and, since IT tends to represent a substantial cost, it is often seen as a prime candidate for cuts.

But it is crucial to ­prevent IT cost savings from coming at the expense of service quality.
There is a wide range of areas in which you can control the costs of IT procurement without harming your business. The process concerns not only hardware but also software and skills.

There is a variety of management options too, ranging from purchase and rental to the outsourcing of part or all of the function – the last approach having become more popular in recent years.

Strategies for IT procurement
IT is a valuable resource with a key role to play in sustaining an organisation’s competitive advantage, so this is not only about reducing cost but also about adding value to the business.

It’s therefore important to consider value when you’re considering IT procurement strategies. Value can be added in several areas here, including: increasing efficiency, speed and responsiveness, improving flexibility, solving problems, generating opportunities and reducing risk by improving security.
These value drivers need to be weighed against the following costs associated with IT procurement: hardware, software, servicing, consultancy, operational maintenance (in house), facilities management, supervision and operation. Many of these costs may change over time

It is useful to think of them as representing a kind of “cost iceberg”, which should be drawn when you are putting together a business case.
It’s crucial to have an overall strategy for procurement that is, in turn, part of the IT strategy and linked to the business strategy.

If the business has a low-cost, no-frills focus, for example, then that will necessarily flavour IT procurement with a relentless drive to reduce costs every year. If the business is aiming to differentiate its services, on the other hand, then there will be a predominant emphasis on the value drivers above.

The procurement process
IT procurement is a lot more complex than many managers often realise. It features the following steps: gathering information; deciding the procurement strategy; contacting suppliers; tendering (if applicable); evaluating suppliers; obtaining references; negotiating the contract; obtaining input from the business; dealing with lawyers; signing the contract; using IT products and services; monitoring quality; managing the relationship; and renegotiating, renewing or terminating the contract.
The initial task of shopping around is quite an extended process, including actually defining what you really, really want in the first place; screening suppliers against these criteria; conducting a formal evaluation; and gathering references (unless this is merely about buying a standard piece of kit).

Obviously, the more far-reaching the purchase, the more detailed and structured the process will need to be. It’s essential to seek legal advice before engaging in any type of outsourcing arrangement, for instance, or for any mission-critical IT project.

Contractual considerations
This is a potential minefield. IT suppliers will often quote standard terms and conditions. IT managers have a tendency sometimes to take such terms as read and not challenge these, but you should aim to negotiate the terms that suit your organisation rather than be swept along by what a supplier says.

Treat all of the main sections of the contract – especially those covering service agreements, termination provisions and data security – as negotiable. This may lead to some quite hard bargaining.

If you don’t have a heavyweight procurement manager in your corner, you may need to find someone who is very commercially minded to help here.

It is a good idea to analyse what your relative bargaining power is and to manage that both strategically and tactically. For example, obtain a comparable quote, wait until the end of a month or quarter and then force a better deal – the supplier may be eager to meet his sales quota before the deadline and secure his bonus.

With complex and risky contracts some legal input is essential, but try to obtain this at the lowest possible cost. Also remember that it is as important to obtain commercial input.

For instance, a lawyer may not suggest a provision that you can have supplier staff changed – at no cost in, say, the first three months of the service contract.

The important aspects of contracts (especially those covering more complex outsourcing arrangements) include:

  • Service-level agreements.
  • Transfer arrangements for assets.
  • Transfer arrangements for staff.
  • Pricing frameworks.
  • Payments.
  • Warranties.
  • Termination arrangements, including the handover process.
  • Intellectual property.
  • Data security and confidentiality.
  • Arrangements in the event of the suppliers’ bankruptcy.
  • Arbitration arrangements (it’s cheaper than litigation).
  • Price renegotiation.

It is advisable to have a provision for price negotiations every two years, say, because IT costs tend to fall quickly.

Plotting assumptions on an uncertainty-importance grid

Plotting assumptions on an uncertainty-importance grid

The main risks
All risks should now be assessed before proceeding with the contract. The most important ones include:

  • Big implementation project overruns.
  • Poor service quality.
  • Technological failures or deficiencies.
  • A failure to hit cost reduction targets.
  • Supplier discontinuity. If the vendor does go bankrupt, that could be a real problem for you, so you need to assess the insolvency risk.
  • Major disputes.

Here it is good idea to apply some formal risk assessment techniques. The chart below plots the main assumptions that you are making on an uncertainty-­importance grid. Assumptions that fall in the bottom-right quadrant of it are clearly the ones to manage most closely.

Relationships with vendors
It is fashionable for suppliers to talk about forming “collaborative alliances” with  their customers. Indeed, for larger contracts that is the ideal scenario.

If the parties are serious about having a “win-win, ­positive-sum game”, they need to be ­culturally compatible. This means that senior managers on each side must be prepared to develop a close understanding and good working relationships with each other.

Where both sides are focused on maximising their profits from the deal, it’s easy for the “partnership“ arran­gement to become an adversarial game in which contractual loopholes are exploited.

Typical performance measures will include service-level-agreement metrics such as whether implementation project milestones were reached on time; value added; costs (direct and indirect); and customer satisfaction ratings.

Critical success factors
The main success factors are as follows:

  • Striking a balance between cost reduction and areas of targeted value.
  • Ensuring that your approach to IT procurement fits your organisation’s IT and business strategies.
  • Developing a robust and discerning IT procurement process.
  • Obtaining adequate legal, commercial and business input.
  • Leaving nothing to chance on a contractual level.
  • Remembering that most aspects of the arrangement are negotiable.
  • Aligning your organisations properly if a strategic alliance is desired.
  • Recognising that when big IT changes are afoot there is likely to be a dip in service performance during the transition – and acting to prevent this.
  • Conducting a thorough assessment of uncertainties and risks.

Tony Grundy is the director of Cambridge Corporate Development and visiting lecturer at Henley Business School

Photo: Shutterstock

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