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4 IT contract negotiation strategies to drive value in 2021
To ensure businesses today can effectively save costs through IT sourcing and outsourcing, we're offering four tips for IT leaders to consider when in negotiations with providers.
As IT leaders look to reduce costs and improve service delivery, they need to have a clear focus on adjusting their IT contract negotiation strategies for IT sourcing and outsourcing engagements.
Why? If contracts are negotiated well, cost reduction can run 15% to 30%, as automation enhances much of what was previously pure labor arbitrage. Technology tools and automation now result in fewer outsourced resources needed to perform the same work. Some first-generation outsourcing deals can produce even higher savings -- exceeding 50% in some cases -- through a combination of productivity improvement, automation and labor arbitrage.
Evaluating desired outcomes and opportunities for value creation and innovation will look entirely different now given the pandemic's impacts, as there are a host of new business levers and economics to consider for long-term success.
The following are four key considerations for enterprise IT leaders to use in provider negotiations to drive long-term sourcing success.
1. Utilize extended remote service delivery benefits
With significantly expanded access to the remote workforce over the past year, enterprises can now use a larger qualified IT talent pool than before. This has resulted in a buyer's market, delivering enterprises greater flexibility to more easily hire employees or utilize outsourcing services from remote locations.
Large enterprise IT teams can benefit from these expanded possibilities of hiring employees across the U.S. or even globally. Instead of requiring them to be in a central facility, it opens the aperture of the talent pool and enables that talent to be hired in lower-cost parts of the country. At the same time, the ease with which companies have been able to adapt to the remote workforce also makes it easier to imagine hiring contingent workers and outsourcing services that are provided from dispersed geographic locations.
As a result, more companies can consider renegotiating existing outsourced services both onshore and offshore, where they can utilize skilled workers at a lower cost due to geographic location flexibility. However, due diligence is still necessary to ensure specific types of work are performed offshore per strict regulations in industries like healthcare, including healthcare systems, payers and pharma.
2. Negotiate the management of remote delivery
The new reality of the remote workforce -- employees and outsourced resources -- created a need to more effectively monitor and confirm the efficiency of remote resources performing both IT and business process-related functions. There are a growing number of process discovery and monitoring tools in the market. These tools deploy sensors onto desktops and laptops and/or install browser plugins to enable monitoring of user activities, including which applications they access and what tasks they perform within those applications. These tools are highly customizable to address security and privacy concerns, including the ability to mask data types and anonymize sensitive information, and can typically be activated or deactivated by the organization's user admin.
As companies determine how they will allow resources to perform work moving forward, IT leaders should consider how these new tools can help align remote user activities with compliant security plans and streamline business performance. There is a wealth of use cases for these tools, including monitoring productivity, performance and compliance for remote users.
Remote delivery also impacts the due diligence process for selecting outsourced providers, as conducting site visits and meeting vendor teams in person are no longer options. As these steps are incredibly important, setting up appropriate remote reviews of products and teams requires new thinking.
3. Prioritize security and privacy to protect the bottom line
Leading enterprises have elevated the importance of privacy and data security over the past few years as the cost of poor security measures can be catastrophic for a business -- whether through loss of intellectual property, customer confidence or revenue from hijacked business operations. The increase in the remote corporate workforce has put an even greater strain on enterprise security risks, thus requiring significant contractual changes in how suppliers and employees access confidential data.
In addition to implementing new organizational rules, policies and constraints, enterprises are transferring the pressure of security risks onto suppliers and then auditing their compliance on an annual or semiannual basis.
To strike a more collaborative approach with suppliers, while ensuring proper security measures and protecting a company's bottom line, enterprises should take a proactive stance in ensuring contractual changes include the addition of requisite privacy and security requirements, with which all suppliers must comply. These include the following:
- well-defined requirements for physical security, requiring all data to reside on client infrastructure;
- requirements for suppliers to use client laptops or images that are remotely managed;
- limits on supplier resources with access to client data;
- limits on what the supplier can do with client data;
- requirements for supplier resources working from home from an offshore location;
- limits on what the supplier can do from sites other than supplier delivery centers;
- requirements related to informing the client of even the possibility of a breach; and
- uncapped liability associated with breaches of confidential information due to supplier negligence.
4. Acknowledge knowledge transfer shifts
Challenges with knowledge transfer and remote transition of services in an environment constrained by travel have created unique dynamics that should be considered during contract negotiations and vendor selection. Transparency is paramount, and it is essential to have a solid understanding of a provider's methodology for gathering and transferring company- and job-specific knowledge as early as possible -- whether to an internal company or other external provider resources. This enables enterprises to assess their level of comfort with the approach and their ability to support it.
Knowledge acquisition and transfer cannot be successful without active participation from the enterprise client. During vendor selection, enterprises should ask structured questions around how processes and procedures are documented, such as the following:
- Will a process discovery tool be used?
- What requirements are needed from the client to perform training? For example, will client trainers be leading or supporting? Will they be working local hours?
- What tools are needed for interaction and documentation sharing -- i.e., virtual conferencing and/or knowledge management tools?
- Who will be providing those tools, and are there any extraordinary technology and connectivity requirements, such as laptops for portability; accessories, including headsets and video cameras, for video conferencing; and home connectivity enablement?
Overall, savvy enterprises are shifting their IT contract negotiation strategies for effective IT sourcing and outsourcing engagements to ensure cost reduction goals and target required business outcomes are met. With typical business environments undergoing massive changes in a short period of time, it is critical to cover all the necessary bases for continued stability, security and mitigated risks to help ensure sustained value in the year ahead.
About the authors
With more than 30 years of experience, Steven Kirz is a senior director at West Monroe, a national business and technology consulting firm. He specializes in helping clients maximize competitive advantage through innovative technology solutions and uniquely successful vendor partnerships. Bringing expertise in strategy development and negotiation experience across multiple disciplines and industries, he focuses on IT and business process insourcing and outsourcing, application development and maintenance, and complex sourcing.
Rahul Singh is a senior director at West Monroe. With decades of experience driving IT strategy, innovation and IT delivery and leading complex transformation for global organization, Singh has a proven track record in driving value from digital technology and operational transformation. He has served as both CTO for multiple Fortune 50 companies and as a consultant leading complex, large-scale transformation programs.
David Borowski is a director at West Monroe. He has extensive experience evaluating, implementing and managing both retained and outsourced business services environments globally and has delivered more than $1 billion in cost savings, synergies and value for his clients. Specializing in business process optimization and outsourcing, IT outsourcing, domestic and international operations, and supply chain process improvement, his projects have transformed a multitude of functional areas for enterprise clients.