After spending several painful months negotiating contracts with your vendor partners and haggling over every cent for IT resource rates, you finally managed to get the best rate card across multiple roles and geographies. So with a little help from some run-of-the-mill, rate-compliance monitoring system, the hundreds or thousands of projects with these contracted vendors will run on cruise control, right? Wrong. A few months down the line, you’ll notice you are paying more for every hour of work than you were prior to the rate negotiations, even though the rates were negotiated down by 5–10% across the board.
Despite best efforts, the manner in which large organizations source IT projects leaves gaping holes, providing seasoned and entrenched vendors enough maneuverability to recover margins they had purportedly given up during negotiations. It is therefore imperative for procurement and technology managers and line-level buyers to stay ahead of the curve. Here are a few tips that will help them harness the savings potential latent in project-level pricing and staffing:
Source projects in phases instead of monoliths. This is especially beneficial for large, long-term projects. When you group project phases into quasi-independent clusters, you can negotiate the best available deal for each cluster. For example, during the Analysis and Design phases, you’ll likely want to concentrate on quality and engage premium, broad-based, Tier 1 vendors, but for the Testing and Maintenance phases, you could choose a Tier 2 vendor that specializes only in the requisite skills, with potentially significant overall savings.
Evaluate your spend from the inside out. Determining vendors’ degree of flexibility on contract prices doesn’t have to be an undercover, external affair — especially for large organizations with complex vendor relationships. External rate benchmarks may be readily available, but because the method of normalizing the benchmarks to make them comparable is prone to errors and false positives, you can’t always depend on them. Instead, companies should look within, where immense potential lies in gleaning intelligence from different groups and portfolios within the organization.
Vendor representatives offer varying degrees of discounts and rebates to their clients based on their sales targets, types of work, client relationships, incentives for incubating nascent technologies, and more. These favorable terms are often never advertised by vendors and go unnoticed by procurement managers. Leveraging a robust Spend Intelligence tool that brings together enterprise-wide data on IT professional services spend can help remove this information asymmetry.
Get discounts on the spot. Vendors have huge incentives in providing you deals on certain types of work and certain roles. For example, a vendor might have a Testing CoE (Center of Excellence) for legacy mainframe projects at an offshore location. A combination of cheaper location, mature processes, and an experienced and efficient workforce has brought down its cost of delivery by a good 25–30%. If you nudge the vendor just a little, you may get a 10–15% discount on all QA testers for mainframe apps.
Stay on top of project staffing. Now that you have the best possible rates for your project, the next step is to keep an eye out for project structuring vis-à-vis senior vs. junior resources and onsite vs. offshore resources. Staffing needs for projects change with each phase that the project is in. You may be bleeding money — despite having negotiated the best available rates — because of top-heavy staffing. (An onsite senior resource is often four times as expensive as an offshore junior resource.) Through internal benchmarking of similar projects, you can detect anomalous project structures (such as a preponderance of onsite project managers during the maintenance phase) and take action to maintain economical staffing throughout the lifecycle of the project.
See whether a flat rate works for you. Constantly monitoring project structures doesn’t have to be the norm. Put the onus on the vendor. Many vendors offer flat rates on certain types of projects. In such an arrangement, you pay one flat hourly rate regardless of the skill level or location of the vendor resource. So an onsite project manager will cost just as much as an offshore programmer. You pay a premium on junior roles but get a huge discount on the more expensive senior roles. In the long run, the blended rate for a flat-rate project is much lower than a project with ceiling rates for each role. And since the vendors have complete control over the project staffing, they can leverage economies of scale and scope to get the work done at a much lower cost, making this a win-win solution for both you and the vendor.
Opera Solutions knows the kinds of challenges associated with IT spend. We’ve combined years of experience in IT professional services and sourcing with cutting-edge machine intelligence to create Signalytics: IT Professional Services, a cloud-based Big Data solution that automates many of the savings levers you see above (plus others), so you’re never caught off-guard by the final bill.
Apart from providing extremely granular visibility into your organization’s IT spend, it delivers specific recommended actions for you and your IT managers to take, helping you negotiate better rates, catch noncompliance, and monitor project and resource-level opportunities that can save your company millions. And IT is just the start. The Signalytics Spend Intelligence Suite offers many modules, covering various categories of spend, as well as an Enterprise module, which provides broad visibility into all of your company’s spend.
See how our spend solutions can help boost your company's bottom line.
Paresh Chiney is a manager for the Enterprise Solutions group at Opera Solutions. He holds a Post-Graduate Diploma in Management from the Indian Institute of Management and a Bachelor's degree in Computer Engineering from Shri Govindram Seksaria Institute of Technology and Science, Indore.