Cutting costs sensibly

I've been quiet for a while, watching how people in our industry will react to the ongoing global economic turmoil.

One reaction that is gaining in popularity is cost cutting. In many ways, this is both rational and something to be expected. The deeper question is how to go about doing this, especially with regard to outsourcing service contracts.

One straightforward approach is to reduce the volume of services being obtained. For example, you may not need to process as many mortgages at the moment, thus, reducing the volume of services that you require. Most, even basic, sourcing arrangements cater for this kind of volume flexibility, although potentially with a lead-time for significant volume changes.

The question here though is, do you have pre-defined pricing for such volume reductions. If not, then you have a negotiation task and timeframe in order to implement a volume reduction. And you are having to do this negotiation at a time of weakness as your service provider knows you are desperate for some sort of savings--hopefully, you're not in that situation (and if you are, get some external help).

A second straightforward sounding approach is to reduce the actual services being obtained. But, that is only straightforward if your sourcing arrangements were built not only to allow such reductions, but also with pre-defined pricing for certain types of reductions. In other words, the arrangements were designed within an overall strategy that addressed service changes within a reasonable pre-defined framework that works for both the buyer and the seller of services.

If they were not, then you have a significant negotiation task ahead of you determining a couple of key things and doing that in the pressure of economic turmoil. First, what services can you sensibly eliminate without creating undue risks for your business? Second, what is the fair price reduction for the elimination of such services (remembering that creating undue risks for your service provider creates risks for your business also)? If you are in this situation, you should definitely get some external help.

What other ways of sensible cost cutting have you seen?

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Michael Rehkopf

Michael has more than 20 years of experience in operations, strategy and sourcing covering all major parts of the globe. He has also worked for Australian, Canadian, German and Japanese companies in both business process outsourcing and IT outsourcing.
Michael's industry experience includes the financial services, manufacturing, telecommunications and travel sectors. He leverages this diverse industry experience and his university background in accounting, IT and his Master of Dispute Resolution, to assist clients in the development of business strategies and the implementation of sourcing strategies. These include the associated evaluation, negotiation and organizational change.
Michael is currently a partner at TPI, the world's oldest and largest sourcing advisory firm. Prior to joining TPI, Michael held leadership positions with Siemens Business Services, OpenPlus International, Mitsubishi Electric and Netron.