Managing technology costs
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Given the complexity of IT contracts, careful consideration is crucial to ensure a fair relationship. Regular reviews ensure the operational terms and pricing are working for you, to help manage costs, according to David Brook of Turnstone Services, a specialist in IT procurement and digital consultancy.
“When it comes to fair contracts and service level agreements (SLAs), providers usually have it in their favour,” says David Brook of Turnstone. “And this is not the legal stuff, but areas such as opaque pricing terms, which make invoice checking next to impossible”, he points out, suggesting customers review their contracts.
The firm has reviewed over 200 IT and telecoms contracts since 2006, and none have received green lights across all parameters. Turnstone find between five and 20 red flags, ranging from auto renewal and price rise, to a lack of useful SLAs, no service credits and no explicit exit plan, and more. “These are important operational areas which can and do bite if left unresolved. Furthermore, it is a myth that you are stuck with your existing contracts.”
Crucially, being within a contract doesn’t mean hands are tied. “It’s absolutely do-able to review and resolve issues mid-contract. It needn’t be antagonistic; it requires a methodical and professional approach. Some people like to get us involved to preserve the relationship or to bring professional negotiation and drafting skills.”
He says it’s worth considering a review if your requirements have changed since the contract was signed. “Whether you are using more or less of the service, a change in usage is one good trigger to review it. We recently saved a client 18% on a longstanding software agreement, which the client was using less of since they signed.”
A contract review will highlight the unfair mechanisms present as well as what is missing. “We’ve seen Saas contracts that are silent on IT security, data protection and disaster recovery. This loads a huge amount of risk onto the customer, when in reality there are measures the vendor can and should have in place to mitigate all of these.”
After the initial review, all red flags are discussed with the client, before negotiating and redrafting them with the supplier. And it may be a valuable undertaking, with Brook estimating they resolve 60-100% of red flags identified.
Timing and benefits of reviewing contracts
Cost reduction is top of the agenda for many CTOs in the current environment, with mid-term savings of 10 to 20% achievable. To help prioritise which contracts to address, Brook suggests picking ones with a value of more than £50k and which match one or more of these criteria:
- Contracts which have been unaddressed for two or more years (including auto-renewals)
- If you are still on the supplier’s standard terms (including web-based T&Cs)
- Where the supplier has newer solutions
- Where you believe there is cost-saving potential
- Where your usage / requirements have changed since you signed
“There more of these that ring true, the more likely it is that it is worth a review. And remember if the contract was reviewed by legal professionals only, the operational side of things may not have been considered.”
There are myriad benefits to reviewing contracts, even aside from the obvious cost benefit where savings can be negotiated. David explains operational reviews can provide visibility of your key exposures, such as disaster recover or security, and this visibility can help provide intelligence for informed decision-making on when and whether to address issues. It can also help identify and trap problems before they hit, mitigating nasty surprises.
And the biggest surprise David reports? All suppliers have been willing to negotiate.
Wider cost elements
Different products have different considerations. Ahead of any negotiation David’s team prepare a plan with the client. “We look at the key points in the negotiation plan and agree with the client what’s the ideal position? What’s realistic, and what’s our fallback?”
Going further into the key cost drivers inside IT contracts:
SaaS deals – These often contain an “up quick, down slow” mechanism, meaning if you want more service you can do that immediately, but if you want to reduce service there’s an artificial time barrier.
ERP – Have you got the right license mix of users? You may have been driven to guess the right mix pre-implementation and then find rules preventing you from changing it after usage commences.
Implementation cost iceberg – Production software costs and project management are often quoted upfront, but then you may find significant costs below the water line, such as integration costs or data migration. And these costs can be significant even for apparently simple scenarios.
Co-terminus – If the clock restarts for three years every time you get a new mobile handset, you’re never free – a situation which suits the vendor rather than you.
Tiered cost for usage – You expect if your usage goes up, your per-unit cost should go down. This may not always be the case though.