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Article

Finding Gold in a Bleak Economy: Part 1

By Craig Loughrige
Senior Consultant

Nearly everyone is feeling the pinch of the economic downturn. Management teams everywhere are struggling to adjust budgets and looking for operational efficiencies to execute their plans. Smart teams are also looking for ways to position their organizations for the next growth spurt, not just hunkering down in the hopes of riding it out.

This article is about one way to both trim your budget and position your company for the future. The target is procurement; you can find gold in the money you spend on the procurement of goods and services, especially in information technology (IT). Many companies in our industries spend 60% of their procurement funds on IT, and the rich vein in IT lies in IT contract labor services. We typically see our clients reduce expenditures from 20% to 35% in this area alone. One recent client achieved a savings of $22M on its $60M annual IT contract labor expense. In addition to the financial benefit, their program also yielded these benefits:

	Improved quality of service.
	Rapid placement of contractors in open positions
	Streamlined invoice processing and administrative efficiencies
	Fewer vendor interruptions

	Improved vendor relations, which yielded higher quality placements because vendors understood the requirement.
	Fulfillment of goals related to minority and women vendors. If this appeals to you and you pride yourself on being a tough negotiator, look out! As a deeper drill into the traits of the procurement environment will show, this takes more than negotiating skill. Why?
	There is no control on how many vendors you have or how you add more to the mix.
	There are too many vendors (more than 10), which dilutes leverage and raises costs.
	The company has relatively weak relationships with vendors because there are simply too many vendors with which you discuss mutual business needs.
	The company has higher processing costs and slower fulfillment because it does not shift work (like interviewing and reviewing resumes) to the vendor.
	Roles and responsibilities are both unclear and inappropriately applied. Companies turn all their power over to the vendor through inappropriate shared information; many faces to the vendor.
	The company focuses on the internal function rather than the integrated vendor stable; enabling vendors to charge different rates for the same skill and skill level.
	The process to fill an opening and establish a rate is cumbersome and costly. Note: Skill sets and demand volume do not drive the number of firms needed. Sound familiar? If it does, your company would probably find value in an IT procurement program. How do you mine the value from such a program?
	Establish a central vendor program with appropriate controls and monitoring. The program should be easier to use and less bureaucratic. You want vendors to consider it a privilege to be one of your vendors.
	Limit the number of vendors to about five to eight for contract staff augmentation work.
	Demand low cost, appropriate quality, and timely execution on every deal.
	Establish a set rate for each job title and level and allow only that rate, not a maximum rate with an RFQ for each assignment with a negotiated rate.
	Tighten the fulfillment process for every placement to manage the mix of junior and senior consultants to control costs.
	Send vendors back to the team.

Be prepared for detractors, especially among the IT managers. They will say that they have to retain a certain firm even though their price is high, or that they will lose a valued resource who is the only expert, or that a small number of firms cannot handle their requirements. But these concerns can be overcome by understanding the structure of vendor firms and working internally as a team, showing one face to the vendor.

In Part 2 of this series, we’ll explore the ways to implement an effective IT procurement program.