Rate Renegotiation: (Almost) Everyone's Doing It

The latest services spend data from Forrester’s Q2 2009 Enterprise IT Services Survey is in, and it isn’t pretty. When 710 IT services decision-makers were asked how current economic conditions will affect their IT services spending over the next 12 months, 56% stated they expect a decrease of at least 5%. Conversely, only 14% expect an increase of at least 5%. The remaining 30% expect spending to remain more or less the same.

Let’s take the 56% that expect at least a 5% decrease in IT services spend. When we asked these 399 people what their firm’s top IT priorities would be over the next 12 months, one priority (out of the 12 we gave them) overwhelmed the rest — renegotiate rates with current players. Eighty-three percent — yes, 83% — rated this either a high or critical priority. Only 3% said it wasn’t on their agenda. To compare, none of the other 11 priorities, which included things like moving to a fixed-price pricing model, implementing or expanding the use of offshore resources, and taking a more consolidated, single vendor approach, cracked 50% in terms of being viewed as a high or critical priority.

To summarize, providers will face pressure on two fronts: 1) increasing pressure from their clients to renegotiate rates; and 2) increasing pressure from internal stakeholders to reduce the bottom line.

What does this mean for clients? Sourcing groups thinking about trying to squeeze cost savings from existing contracts will have a lot of company. Although some providers are willing to decrease rates – particularly where they have a long-standing relationship or in markets where providers have resources on the bench, other strategies will be to shift to new types of contracts such as outcome-based. Sourcing professionals looking to cut costs should also be prepared to try “less popular” cost-saving options like vendor consolidation or moving additional work offshore – and often will maximize cost savings by pursuing multiple strategies.

Comments

re: Rate Renegotiation: (Almost) Everyone's Doing It

It's interesting that suddenly consulting rates are increasing in new proposals. I'm still researching to see if it's because clients are spending more now, or if consultants are being optimistic about the market demand.