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Companies Waste Or Overpay Service Vendors At Least 10%
This article was originally published on Forbes by Peter Bendor-Samuel, Founder & CEO, Everest Group, and has been reposted here with the author’s permission.
Organizations buy services from a wide variety of service providers — ranging from managed services for IT applications and infrastructure, contingent labor to supplement gaps in skills and availability, cloud services, business process services, and more. We at Everest Group looked at the administration of these contractual relationships and discovered that most organizations leave tens of millions of dollars on the table. Why does this happen and what is the answer to this dilemma?
Why Organizations Leave Money On The Table
Here’s what happens. Contracts for services are complex and the traditional MSA (master services agreement) and SOW (scope of work) structure make understanding the commitments difficult and time-consuming. Furthermore, administering these contracts also requires an understanding of the context in which they are used (the location where they are consumed, relevant industry information on current pricing and practices, and many other variables).
The concept of standard rate cards attached to master contracts may appear simple in concept but is complex in practice. Consequently, firms often pay twice for services that were included in other services, pay for services not utilized, overpay for services where discounts and relevant location adjustment should have been applied, and the list goes on and on.
Often, the contract administrators lack the context, training, and access to current market information that is required to avoid overpayment. Consequently, it is not uncommon for firms to overpay by as much as 10% or more of their contracted fees.
Firms that make the investment to appropriately train and equip their contract administrators save millions of dollars and further improve the value they get from these potentially strategic relationships. Furthermore, firms that do not invest in equipping their contractors with the relevant information and training often create and increase contractual friction with their vendors, further adding costs for themselves and for their vendors.
The Missing Ingredient In Contract Administration
A common mistake firms make is incorrectly believing that once a contract is signed the rate card and structure will not require adjustment during the life of the contract. In almost all cases, this is an erroneous assumption. Current market information is always necessary when administering contracts; however, few firms equip their tactical administration teams with this information.
Example Of A Common Contract Administration For AI Skills Problem
An example of what commonly occurs in the contract administration problem is negotiating for skills relating to new technologies. A company may have a robust contract giving it seemingly attractive prices for a wide range of skills and capabilities. However, the availability of these skills and the quality of these skills may change radically by the time the firm wishes to access them/ Geographic differences further exacerbates this problem.
As an example, consider the market for artificial intelligence skills. In just a few short months, the availability of this skill set evaporated. Furthermore, firms moving from experimentation to full-scale application dramatically increase the depth of talent and level of experience needed. It is not uncommon for customers wanting to launch or maintain projects utilizing AI technologies finding that the contracts and rate structures they thought they could rely on are no longer up to the task of ensuring a sufficient supply of competent talent.
If vendors cannot charge higher rates, they cannot pay enough to retain their talent. So, the talent moves on, leaving the customer with inexperienced talent, low productivity and, often, failed projects.
Because of the current context and marketplace, the client in this example can’t get vendors to provide AI skills at the price it originally negotiated. As a result, the contract administrator faces the following dilemma:
- The business has a growing backlog it can’t retire because it can’t obtain the people, or the available people are not qualified or experienced enough to meet the company’s needs.
- The contract manager must either frustrate the business or agree to pay an off-rate card price. But what price is fair, and on what basis can the parties agree on a new rate? Without market rate information, the contract manager is at the mercy of the company’s vendors. There is not enough time to go out to rebid the contract. Even if there were time, this is one rate of many, and the market test is not viable.
Here’s another example: a customer that negotiated a rate card at the then-current market prices. But the constraints in that skill set came down, so the labor is now cheaper, and the customer now pays more than it should.
Opportunities for overpayment don’t stop with labor-based rates with infrastructure usage. SLA-based rates also are replete with opportunities to overpay. Even with the simplest of contracts, the practical implications of administering them becomes complex and carries the certainty that the customer will end up overpaying.
The Answer To The Dilemma
To do effective rate card administration and not leave money on the table, customers must be able to get current market information around service level and current pricing by component. They need ongoing education as to how that information is applied in the market and where the customer’s opportunities are.
If this ongoing information is introduced into the category management and purchasing executive function, then they can administer rate cards and contracts much more effectively and get much greater value and much lower cost for those functions.
Somewhat paradoxically, the service providers and vendors also benefit from the customer having this information. Although an ill-informed customer may seem like an easy target, over time, the situation results in a problem customer. So, most good service providers want their customers educated as to what they’re buying and how to best interact with the provider. This will take tremendous costs out of service delivery and frustration out of the relationship.
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