BUDGET SHRINKING? LOOK INSIDE FOR COST SAVINGS TO FUND OPERATIONAL INVESTMENT
IDENTIFY POTENTIALLY SIGNIFICANT COST SAVINGS IN EXISTING COMMITTED OBLIGATIONS.
Craig Johansen
Sourcing and Vendor Management Consultant
As we all get pulled back and forth in this tug-of-war between inflation and recession, more and more organizations will begin (or already have begun) to tighten spending, and IT budgets are rarely immune to the pain. You may already be experiencing that, or you may see the writing on the wall. The obvious challenge is that, often, the obligations of you and your team to deliver, or even continue to innovate, are not similarly reduced. So, at the very least, you need to figure out how to do the same with less, if not more with less.
Fortunately, there are ways Sourcing can help. We’ve been through this before in 2001, 2008, and most recently in early 2020, and we’ve seen clear examples of how Sourcing, by shifting their focus, can help you find cost savings to help fund your budgetary shortfall, so you and your team can continue to provide great service.
How do we do this? By turning our attention inward to existing contract obligations by focusing on committed spend, especially when minimum commitments are involved, and on renewals.
When renewing term subscription agreements, the focus is typically on pricing and minimizing any year-over-year price increases, particularly in a challenging inflationary environment as we are now experiencing. However, recently, we have experienced instances where there may be even greater opportunity for cost savings – the minimum commitment in agreements where the subscription fees are based on usage!
Often Clients, particularly those on a growth trajectory, are lured into making somewhat aggressive minimum monthly, quarterly or annual commitments to take advantage of higher-level discounts offered by the vendor. If the minimum committed usage is realized, the agreed-upon arrangement becomes a win-win for both the vendor and Client.
However, sometimes the minimum committed usage turns out to be overly aggressive; so, the Client ends up paying a substantial “true-up”, which is equal to the difference between the minimum commitment and actual usage during the agreed-upon commitment period. That “true-up” cost can far exceed any benefit derived from the more deeply discounted promotional price agreed upon by the vendor in consideration of the minimum commitment made by the Client.
As a result, we recommend that companies in the process of renewing subscription agreements review their actual usage vs. minimum commitments to ensure they typically are deriving the benefit anticipated at the time the minimum usage commitment to the vendor was made.
If you have been paying “true-up” payments to cover shortfalls in actual usage vs. committed usage, we highly recommend you consider “right-sizing” your minimum usage commitment, even if it means a slightly higher base price. However, we have found that vendors often do not increase pricing as much as you may expect after “right-sizing”, as they may be anticipating the potential for growth that may return you to prior commitment levels.
Also, in times of uncertain economic conditions, such as we are currently experiencing, even if you have been achieving minimum commitment levels during the past year or two, you may want to reforecast usage scenarios to determine whether some “right-sizing” adjustment to your minimum commitment may be advisable until you have more clarity on projected future usage.
Bottom line, a “right-sized” minimum commitment can yield a favorable arrangement for both parties. However, an overly aggressive commitment resulting in underutilized capacity can yield a “great price, but a bad deal”!
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