Mind Your P’s and Q’s to Control Outsourced Costs

Historically, the general focus of our outsourcing clients has been to use an RFP process to get the best price for the services that they procure. The primary driver is to improve the economics of the cost center involved in the outsourcing effort. However, in a price times quantity model (“P x Q”), most of the money to be saved lies in the “Q” dimension, not the “P” dimension.  Unless your price points are way out of line, P improvement in most engagements is in the 10-20 percent or higher range. Your greater cost reductions will potentially come from the Q end of the equation.

Consider these Top 5 tips for understanding and managing Q in your outsourcing environment:

1.  Get into the habit of Q (consumption) reporting. Pareto’s 80/20 rule often applies to heavy users of outsourced services. By reporting usage statistics, especially to the top 20 percent of users who drive volumes, you may reveal areas of consumption that have little to no business value and encourage heavy users to reduce their Q footprint, thereby lowering your overall costs.

2.  Avoid “The Tragedy of the Commons.” Many costs centers do not charge back to users. The reasons can vary, from corporate accounting policies to allocations that add no value.  However, failing to drive cost to the “cost-causers” will lead you into “the tragedy of the commons” trap. That is, people will use resources without regard to moderation if it appears to them that the activity is “free.”  By formally or informally showing your services users the costs of their activity, they will act more rationally in their business decisions. Properly designed outsourcing contracts are designed to give you an elastic cost model that facilitates doing exactly this.

3.  Understand the power of Q ratio analysis. Convert your business drivers into relevant business ratios such as calls/user, storage/customer, IMACs/user, requests/agent, etc. When you look at the taxonomy of these ratios against your entire business, areas of Q reduction will become apparent. Also, Q ratio analysis will allow you to benchmark your organization and set reasonable objectives.

4.  Install a capacity model. Once you have a framework for understanding your Q’s by source and by use, then you can begin some top-down reductions to pressure out Q volumes that are really unnecessary. For instance, aim to reduce the monthly capacity in the aggregate by 5 percent. Do not restrict any users, per se; just put in a priority demand management system, set some factory-capacity- style limits, and see what comes of this process. The first 5 -10 percent reduction might come easier than you think.

5.  Set up a demand reduction incentive plan. If reducing 30 percent of your volumes translates into a 20 percent cost reduction, offer up a challenge to the user or organizations that can control these volumes. If they achieve 30 percent or more reduction, then hand out positive incentives such as budget relief, bonus kickers, comp time, etc.

ISG’s experts can help you achieve your organizational goals through objective advice, knowledge of your industry and experience with arrangements from simple to complex. Contact Tom Young, Partner & Managing Director, ISG, to learn more.