Outsourcing: Ways to Cut Costs in Troubled Times

Originally published December 16, 2008

Keywords: outsourcing, COLA, currency

fluctuation, outsourcing contract

In these troubled economic times, many of you have identified an

urgent need to find opportunities to reduce your costs. This Client

Alert offers recommendations on ways to save money in your existing

sourcing arrangements and by entering into new sourcing

arrangements.

Ways to Save Money on Existing Outsourcing

Contracts

Companies that have already entered into outsourcing contracts

have these opportunities to reduce the costs to be incurred under

such contracts:

Work with the provider to identify ways to reduce the cost of

service delivery and pass through the resulting savings to the

customer. For example, most Mayer Brown contracts contain

provisions requiring providers to work with customers to accomplish

cost reduction.

Relax or eliminate contractual requirements that increase the

provider's costs without delivering commensurate value. Look at

the contract and ask, "knowing what I know now, is it worth

the cost to restrict the provider in this way?"

Permit the provider to move additional services to offshore

facilities in order to leverage labor arbitrage to achieve

immediate savings (including tier 1 and tier 2 offshore

locations).

Reduce or eliminate the provider's risk in exchange for

price reductions. The added risk in pricing terms, such as COLA and

currency fluctuation, are easy to trade. Also look for protections

that seem less valuable now that you know the provider.

Initiate the renegotiation of some or all of the contract,

especially if it has been some time since the last re-negotiation,

or if provider defaults have created bargaining leverage.

Verify that the provider is delivering all of the promised

services at no greater than the promised prices. Many providers are

responding to economic pressure by reducing headcount,

underperforming, and/or taking strained contractual positions.

Implement gainsharing opportunities to incent the provider to

deliver desired cost savings.

Expand the scope of the contract to include more functions

where savings are possible.

Implement other cost cutting measures, such as application

rationalization, that reduce the service volumes under the existing

contracts.

Negotiate gold, silver and bronze service offerings to allow

business units to select the value/cost to support their

business.

Exercise audit rights to find overcharges and identify cost

reduction opportunities.

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