4 ways CIOs can reduce IT costs through third-party spending

1. Identify billing errors

Potential savings = low to medium

Contract complexity, the nonrecurring nature of some adjustments and the inherent inefficiency of the billing administration process frequently result in invoicing errors. These errors often go undiscovered and may manifest in various ways, including applying rates that are too high, incorrect quantification of the number of billable units -- e.g., transactions, resources and consumption levels -- or pricing adjustment errors -- e.g., cost-of-living adjustment and wage inflation. Auditing invoices and comparing charges to what is allowed and agreed upon contractually, such as per rate cards and pricing exhibits, may identify previously undiscovered errors, resulting in owed credits and reductions to future charges.

2. Rationalize maintenance spending

Potential savings = medium

Examine your application license and subscription portfolio, both for contracts with the option of termination or temporary to ensure cost optimization. Consider terminating maintenance for software that is no longer being used or that is unlikely to require updates in the future.

The same can be true for hardware maintenance and service delivery across the computing and storage infrastructure and for network equipment, such as Cisco and IBM. For a Microsoft portfolio, carefully review the software assurance program to identify opportunities for removing applications -- depending on the agreement -- to reduce unnecessary software maintenance expenses.

3. Apply demand management flexibility

Potential savings = medium to high

For real savings, the goal is to use less and only pay for what you are using. The two most promising opportunities for rapid, demand-related IT cost savings are with cloud providers and software licensing spend. For organizations utilizing cloud-based services, consider the following for cloud spend:

• Utilize automated tools to conduct cloud usage audits, which can rapidly identify opportunities to shed expenses.
• Ensure compute workloads are matched to the most economical instance types that meet requirements and storage is tiered to the most economical storage performance type.
• Check pay-as-you-go containers to identify those that have not been used over the past 30 to 90 days.
• Review instance inventories, and spin down instances that are not required.
• Consider reducing CPU or container size where possible, especially for nonproduction systems.
• Look for pay-as-you-go instances that can be converted to reserved instances.

Similarly, for software subscriptions, consider the following:

• Explore opportunities to delete users on monthly subscriptions.
• Review deployments to identify opportunities to reclaim entitlements from inactive users.
• Evaluate where tools are not being used, and terminate subscriptions where possible.
• For organizations that are in the middle of a transition to cloud service software subscriptions, explore opportunities with the software providers to suspend the monthly subscriptions while the implementations are delayed or extended. Typically, these subscriptions are "take or pay," and clients are paying for the full volume of users, even though they are operating only nonproduction instances. Software providers may consider extending the agreement on the back end, while giving you temporary relief now.

4. Negotiate quick wins

Potential savings = high

Ask your strategic partners how they can assist with reducing IT costs, and be open to their suggestions. Engaging in collaborative discussions with your suppliers to explore options that deliver mutual potential benefits offers the most compelling opportunity to create meaningful cost savings achievements. While it's unlikely that suppliers will provide "something for nothing" -- i.e., reduce overall costs without a corresponding benefit to them -- we have heard from many suppliers that they want and are often well positioned to help clients drive near-term substantial savings.

If a customer can offer increased commitment, reduced risk or future benefit, suppliers can typically provide mechanisms to reduce overall IT costs. Levers, such as extending the contractual term, providing service-level relief -- e.g., reduced fees at risk and relaxed performance targets -- increasing the scope of future services or committing to minimum spend thresholds, enable the suppliers to demonstrate pricing flexibility.

There may also be opportunities to restructure the overall financial framework, thereby accelerating the realization of productivity or other cost reduction commitments in exchange for longer-term considerations. Current circumstances may cause organizations to become more open to options that they had not seriously considered in the past, such as offshore delivery, captive shared service center acquisition and automation programs.

About the author

David Borowski is a managing director at Pace Harmon, a leading business transformation and outsourcing advisory firm serving prominent U.S. enterprises with guidance on complex transactions, process and operational optimization and provider governance. Borowski provides pragmatic and insightful advice that helps Pace Harmon's client base of Fortune 500 and other large enterprises optimize performance, productivity and cost. Pace Harmon Managing Director Andrew Alpert also contributed to this article.