Neverending cost cutting objectives

In the current economic climate, cost cutting measures are still at the top of the agenda for many firms, so I thought it might be good to revisit this topic from a few blogs back.

Previously, I wrote about cutting costs through service volume reductions, as well as service scope reductions.

Recent press as well as industry players are talking about demands for pricing concessions on a fairly consistent basis now. At TPI, we know of several cases in which clients are calling for a 5 percent to 15 percent reduction in the rates they pay for offshore labor.

Such cost cutting leads to pressure in the entire service delivery value chain. If I'm being paid less, then I need to find a way to reduce my costs as well as my risks (which have a cost because some of those risks will eventuate).

So, one action we can expect to see is service providers reducing their costs. On way to do that is by employing more junior (i.e. lower paid) staff for work that is labor-intensive. Now, if those people are less productive because they are less experienced or less well-trained, then the result could actually be an increase in the number of units (i.e. more hours)--thus, potentially increasing the total cost for the client.

And it's not just the number of hours the service provider staff put in, it can also be service buyers who have to invest more hours into managing a relationship with more junior people, thus, giving a double hit.

And that is the key. The focus needs to be on total cost, not necessarily unit costs. Don't get me wrong, in many cases there is a strong link between unit costs, volumes and total costs, but the end-game is to reduce total costs--with anything else a distraction.

With a focus on total cost reduction, the entire spectrum of options becomes available. Some may require harder work, some may take longer, some may work in the short term but cause significant longer-term issues.

Being clear about both short- and longer-term needs and consequences helps guide you through options such as volume reductions, unit price reductions, scope reductions, redistribution of work between service provider and client to improve efficiency and effectiveness, re-balancing of risk to the party best-placed to manage it, and numerous others.

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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.