Driving Better Value From ITO Vendors: Three Cost Reduction Strategies

Information Technology Outsourcing programs (ITO) have been around for more than fifteen years. Early adopters were acquiring application development and maintenance services from India back in the nineties. In fact, it is very rare for any large corporations to provide all of these services internally. Whether your ITO program is ten months or ten years old, there is usually more than one way to drive more value.

The first is to determine how many vendors you are giving your work to, and how many dollars you are spreading across that vendor base. Consolidating your relationships to two or three vendors will concentrate your spend and allow the vendors to acquire greater depth and knowledge on your applications and systems.

Realistically, the larger vendors can hardly give you the time of day for less than $5 million a year. More spend means you have a much greater likelihood of getting the A or B team. Better knowledge of your applications and way of doing business means a greater likelihood of higher quality code and fewer resources to deliver.

This process should naturally lead to an assessment of the nature of the relationship you’ve developed with your top vendors. If every project is a new engagement, and you treat them like a “body-shop”, there is no way that your vendors can streamline processes, selectively automate, or deliver best practices. You likely remember these promises when you have hired them.

But if you tie their hands with your own sub-optimal practices, not only can’t they help you, they will choose to spend their time and energy working with their best clients. Best clients are not always the ones with the largest spend, they can be clients that know how to develop strategic relationships with their vendors that allow them to deliver innovation and thought-leadership.C ost-reduction is a goal for every executive these days.

Here are three successful cost reduction ideas that will help you save money and get best value from your vendors.

Make a Commitment

As part of your annual planning process, commit a healthy percentage of your application development and maintenance budget, by business unit, to your key vendors. This will allow the vendor to assign a dedicated team to support each line of business CIO. You’ll waste fewer dollars on the learning curve for each new project or activity, and over time the vendor’s employees will identify with your organization as part of your extended team and will be motivated to make a difference. Like any good team player, given the opportunity they will make recommendations that streamline your processes and improve outcomes.

Communicate with your assigned teams on a regular basis, treat them well, give them your company’s T-shirts and coffee mugs, and say “thanks” for completed projects that meet your expectations. You can even provide a small bonus for them. This strategy will open the door for negotiating lower base pricing if you’re willing to make a commitment. Expect 5 to 10 percent savings.

Drive More Work Offshore

Increasing the offshore component of your onshore/offshore ratio is an excellent way to save money. Most companies with offshore programs haven’t gone very far down this path. Best practices say that 80% of application development and 70% of maintenance work can be done offshore. I have a few clients that can attest to these numbers, and they have saved millions by improving the mix. Be aware that this isn’t a push-button solution, it takes a lot of work. You’ll need to invest in developing strong business analysts who can do a great job building requirements documents.

Simplify Pricing

The third tip is to develop a simple but comprehensive pricing matrix. It’s simple and easy to remember. What I recommend is capture all skills and applications under three broad headings: legacy, web-based and distributed technologies and emerging technologies. For each heading, define what you mean, list all known applications and technologies under each.

Negotiate offshore pricing including onshore in less than 90 days, and onshore pricing for each tier. Then contractually agree to update what is captured under the three headings every quarter. With this simple tool, you will know what to expect in the way of pricing for every project, and will avoid the annoying habit vendors have of special, higher pricing for new or unanticipated skills and applications. You’ll get consistent, pre-negotiated pricing and are much less likely to feel like you’re being nickel and dimed.

With these three simple tips, you will be able to drive 10 to 15 percent from any ITO program – matured or new.

Linda Tuck Chapman is President, ONTALA Performance Solutions Ltd. She can be reached at lindatuckchapman@ONTALA.com or 416-452-4635