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.
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.