Prices are currently rising enormously for a variety of reasons, and it is becoming increasingly difficult for companies to get by on their budgets.
There are numerous reasons for your budgets to explode, and there's not much you can do about it. That's why it's all the more important to avoid mistakes you might have made in your existing contracts or could make in your future contracts, so you don't incur additional costs.
According to a recent Gartner study, the following 3 reasons can be identified as good ways to reduce price increases in your contracts:
It is a very fine line between over-regulation and unnecessary complication and insufficient service descriptions. Basically, contracts need to take into account every possibility and pre-define a procedure or process for any situation. At the same time, it shall also provide enough flexibility to be used efficiently in operations. This causes a trade-off that many companies struggle with.
This means that, on the one hand, it is necessary to establish a basic framework that provides a fundamental structure for the execution of projects and services. This includes the definition of general processes, governance and policies and more or less a solution path or approach for any future situation or problem. This is also closely related to the following sections, which describe in detail the considered situations specifically.
On the other hand, an accurate statement of work (SOW) must be tailored and defined for the project or service, that covers and addresses any operational requirements. Some important sections of such a SOW are the definition of the scope, the necessary resources, the specific services themselves, and the pricing model to be applied. You see, this already covers the most important questions, like:
However, what is out of scope, excluded from services, or not to be provided must also be clearly defined to eliminate any misunderstandings.
Several prerequisites are necessary for this to be possible:
You must have very clear ideas about your needs and what exactly should be done by the supplier. Therefore, you should coordinate in detail with the respective operational departments and other project participants. Based on this agreement, a first draft of the Statement of Work can be created.
Your first draft must be reviewed by a person familiar with both the project/service requirements and the framework of the contract document. This does not have to be the same person if there is an opportunity for detailed coordination and communication between these individuals. Their role is to fill in any gaps, so that there are no unanswered questions, unclear or contradictory wording, etc. in the statement of work.
Finally, the service description must also be reviewed by and aligned with the supplier so that both parties are clear on the content. It is of utmost importance to have the same understanding based on the formulations of the requirements.
If these steps are followed and the service description sufficiently meets the requirements of the project/service, a major variable cost factor can be eliminated - the change requests.
What should be changed now that all requirements, procedures, deliverables are clearly defined?
In addition to a detailed description of the services to be established, any factors and circumstances that could increase costs on your side must also be considered and predefined. This includes the following 3 topics:
Existing contracts need to be examined and evaluated for regulations related to the application of COLA. For this purpose, it is helpful to compare any provisions and definitions within your contracts with different suppliers, as well as to obtain additional information from various other sources. These can be for example:
In the case of different agreements with several suppliers, it is worthwhile to include this topic in the award decision, especially in times of high cost increases and inflation.
For the preparation of future contracts, this topic must be considered accordingly. In the best case it can be included in a standardized manner across your full contract landscape. In either case, take advantage of your bargaining power when negotiating high-volume, long-term contracts and either
In case of high volumes which you may can guarantee, you can use this for a trade-off – avoidance of COLA in return for volume.
Very similar provisions apply to the use of various FX mechanisms. Review your existing contracts and, if not already done, design a standard model to your conditions that will be applied to all future contracts. Here it is particularly important that you put yourself in a position that transfers the risk of rising exchange rates to the supplier. This ensures that you can keep your costs constant and predictable.
The third issue that often triggers an increase in the cost of predefined services is staffing. The lack of qualified resources is no longer just a side issue. Rather, it has become one of the main barriers for implementing new projects and using new technologies.
According to a recent study by Gartner in 2021, 64% of leading IT executives see the lack of resources as the main problem (compared to only 4% in 2020), while only 29% are more concerned about rising implementation costs.
For both fixed price projects / services and T&M (Time and Materials) pricing models, you really need to challenge your suppliers so they staff the roles according to your needs. Suppliers naturally try to get the most revenue possible by either assigning lower-level staff to fixed-price projects or higher seniorities to T&M projects.
Therefore, always review your requirements and discuss with the suppliers which resources are necessary for what. That should also be reflected in a standard framework for team composition within your service description.
When setting up new contracts, not only the current need should be reflected, but any future needs that can easily be implemented at this point. Here it is especially important to communicate and align with the relevant management positions, and decision makers. These people may already know future projects and requirements that could be directly covered by the new contract through minor adjustments.
The great advantage of including additional services that can subsequently only be called upon as needed is that your negotiating position is greatest at the time the contract is drawn up, and negotiated with new suppliers.
Therefore, you should consider to be of great importance to implement any future situation / any future need by directly including exit clauses etc. in case they are not needed. This way, you maintain your flexibility to call for services or not, while eliminating the risk of new negotiations with increased prices, which would be due to the supplier's increasing bargaining power during the term of the contract.
Costs are rising all around the globe!
Read our guide and find out how to reduce costs overall, increase planning certainty and reduce effort required to produce the same results.
Included in this guide:
This point is as simple as it sounds: Competition improves costs via reducing prices or effort. Avoid depending on a single supplier and contract with 2 or 3 strategic suppliers right away. Each of these suppliers should be able to provide essentially the same services.
In this way, it is possible to compare, challenge and reduce costs as a competitive environment is created and vendors lose bargaining power. As part of a supplier relationship management you can communicate openly that the supplier is listed as a strategic one. But you should emphasize that there are also others listed in the same category which can provide the same.
Then, during operations, create your requirements, statement of works, etc. and distribute them to all of your suppliers. You now have the possibility to compare the offers and select the best fitting one.
Especially when contracting with suppliers who offer a large number of projects / services, high importance must be laid on ensuring that appropriate discount schemes are agreed. It is advantageous for several reasons to contract out a large number of services to one and the same supplier instead of dividing them among several.
To achieve all these benefits, a matrix must be implemented that defines the volume and appropriate reductions per threshold (e.g. percentage points of overall fees). This matrix should best be standardized so it remains comparable across all your strategic suppliers. This helps you shift projects, as they come down the pipeline, to different suppliers where you can best take advantage of these economies of scale.
You should regularly review the matrix and the volumes on it and discuss and coordinate with the Vendor Management Office. In fact, not only the prices for resources / services etc. may change over time. The number of projects and services you need, and purchase may also vary and cause the agreement to be adjusted.
This is the point at which the Vendor Management Office must intervene. Generally, this is the department that should have a clear overview of all contracts and weigh whether to award future contracts to the respective vendor based on a cost-benefit decision. Or even initiate further discussions and negotiations with the supplier to adjust the discount arrangements.
But now that you only have in mind that you should reduce your costs and apply discounts, you should always keep an eye on the risks. You need to weigh risk and economies of scale, and therefore strategically allocate projects well in case of unforeseen total failures.
Now that you are aware of all these possible mistakes you could have made, it is up to you to address and implement them accordingly. Engage in close coordination with all parties involved in the contract to consider all situations and services that should be covered by the contract. Do not limit yourself to one contractor and prepare appropriate mechanisms and schemes with your collaborators (Legal, Financial, Vendor Management Office) to be included in the contract on your terms.
Again, you are on the better side during the contract negotiation as you have an idea of the future volumes and topics and the supplier of course would like to conclude a contract with high sales. Therefore, you play your negotiating power and impose your conditions.
