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Minimize Upfront Costs

By Peter Iannone  |  Posted 10-13-2008 Print

Advice for CIOs to mandate more IT services in an age of tightening budgets.

6. Minimize upfront costs in outsourcing.
Challenge: When businesses are under strong pressure to reduce costs, outsourcing can be part of the solution, but it's critical to ensure immediate savings. The challenge is not just getting more for your money, but getting more for less money.

Solution: Structure your outsourcing deal operationally and financially to get the savings up front. On the operational side, strive to reduce fixed overhead such as people, applications and physical infrastructure. On the financial side, instead of paying $10 million up front to save $5 million a year, negotiate with the provider to spread the costs over time.

7. Outsource for cost avoidance.
Challenge: The pressure on IT isn't just about reducing current costs; it's about avoiding future ones. So consider what expenses you'll face down the road, and address them in your current outsourcing relationships.

Solution: If you want to implement an ERP system for 50,000 employees around the world, you're going to pay roughly $1,000 per employee for licensing, testing and implementation. Instead, you could "rent" such a system from your service provider, avoiding $50 million in projected expenses. Likewise, if you outsource your data center to a Tier-1 service provider, you'll get inherent benefits such as increased security, reliability and scalability, which can help you avoid future costs for upgrades or disaster recovery systems.

8. Plan for the bounce-back.
Challenge: Economic pressure requires you to cut costs today, but remember to plan for tomorrow. If you reduce your labor and knowledge base too much, you could be in trouble when the economy bounces back. For example, you might downsize as you put projects on the back burner, but when the time comes to rekindle them, you won't have the resources available in house.

Solution: When you're outsourcing, make sure you can get the skills you need when the economy improves. Choose a service provider that can meet your needs in both the short and long term. And when you're writing the contract, build flexibility into the agreement, ensuring that providers can turn the dial to increase resources when the time comes.

Peter Iannone is executive director of IT Advisory Services at EquaTerra.  

See also: Top 10 Hidden Costs of Outsourcing

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