You are employed by the Gambell Financial Services Group (GFSG) as the Category

Question

You are employed by the Gambell Financial Services Group (GFSG) as the Category Manager for I.T. procurement. You have just left a Senior Management Team meeting, having presented a report on the status of I.T. procurement. The salient points were:

Annual expenditure (excluding one-off projects)         $30 million

Number of service providers                                       25

Locations to which I.T. services are provided              6

Amount of annual up-front payments                         $18 million

Suppliers in default of contract obligations (last year) 4

Predicted increase in service charges (next year)       3.6% of annual expenditure

After you had presented these basic facts there was a heated discussion. It all began when you expressed the view that the I.T. support contracts that embrace all software maintenance, emergency call-out to I.T. problems, desktop replacement and laptop maintenance and replacement, should be outsourced on a long- term partnering basis (you recommended seven years with an option to extend for a further three years). The I.T. Manager said that he did not agree and that the current arrangement should remain. He was convinced that the current suppliers were all specialists in their field and knew the software better than anyone else. Then the Finance Director joined in the discussion, stating that all he was interested in was cost! Not only did he not want a 3.6% increase, he wanted a 10% reduction in costs. He also wants the up-front payments stopped. The Managing Director who chaired the meeting has given you some actions (see tasks below) and has asked that you report back to the Senior Management Team in two weeks’ time with an agreed position between you and the I.T. Manager.

Tasks

1.    What arguments can you assemble to support a long-term partnering strategy?

2.    How would you contract to deliver the Finance Director’s objective?

3.    Assuming you lost the argument for partnering – what strategy would you deploy to make savings?

4.    Do you anticipate Intellectual Property considerations having any part to play in your strategy?

Could you please answer specifically Question #2 and the 3,4 if possible :

Explanation / Answer

1. The clear challenges that has been posed by the data that is provided is the number of service providers and the different locations that they are present in. For an organization that provides financial services (GFSF) the number of service providers are extremely high. While it is very difficult to provide specific of cutting down costs and delivering on ask of the Finance Director, we shall make a few basic assumptions in order to achieve that.

Firstly our annual expenditure is around $30 million. This needs to be reduced to about $27 million in the coming year. In addition we also see an upfront payment of $18 million and part payments of the rest of $12 million over the year. If we can cut down the upfront payment to half we can then still maintain the average monthly payment of $1 million.

We can assume that currently we make an upfront payment of nearly $1 million plus to each of our vendors. If we reduce the number of vendors then we could negotiate and reduce the overall upfront payment required.

Recommendation will be reduce the number of vendors to half the current number i.e. about 12 vendors. By reducing the vendors and cutting down the upfront payment we could provide the vendors with higher monthly recurring revenue.

While making a contract with the reduced number of vendors we should keep in mind the following points

Overall, the contract should be made more attractive for the selected few vendors when compared to the previous contract. However, at the same time the contract must also protect the interest of GFSF and the vendors.

3. Even if the argument is lost, we still have a strong argument against the 4 suppliers from last year who defaulted on their contract obligation. Naturally GFSF has every right to reduce these 4 suppliers from the current list of 25. This would ideally reduce the cost by approximately 4/25*100 = 16% of the total cost.

This means even if we do not enter into new structure of contracts and vendors, we can still cut the cost down by 16%.

4. IP can be a strong argument for reduction of cost and number of vendors. The reason behind is that currently 25 of the vendors are exposed to our IP. This means the risk associated with the IPs are more right now. If we reduce the number of vendors we can have more control over the exposure of our IP with the partners.

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