IT cost savings – a brief for CFOs and others

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Published 03 June 2020
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CFO, CTOs and others may be tasked with reducing IT costs in the months ahead. Increased IT costs may result in overall cost savings, sometimes even short term. Also, increased spend under one IT contract may reduce costs under another. In this brief, however, we focus on mechanisms for terminating existing IT contracts, or for achieving price decreases. We assume the customer perspective, but IT vendors are themselves also IT customers and may look for reduced IT costs. Furthermore, IT vendors may defend revenues and margins, by preparing a plan for handling eventualities as mentioned below.

Unsubscribe. Many organizations subscribe for software and other IT services in excess of current needs. Firstly, an inventory of current subscriptions need to be made, the next step is then to assess what is not needed and then cancel such subscriptions. In new subscription contracts, special attention should be paid to initial subscription periods, the renewal clause, and to what extent and how one may reduce the volume subscribed for, e.g. users. Furthermore, someone within the organization, it could be the CFO or a contract manager, could for each new contract place a "meeting" in the Outlook calendar, as a reminder for assessing whether the subscription should be terminated or reduced, or not. Alternatively, and even better if there are many contracts to manage, one can use contract management software.

Ask for a discount. In case a customer is in economic hardship and needs costs savings, sometimes simply asking for a discount will work. The request could also be limited to 2020, or some other specified period, project or acquisition.

Engage a license broker or consultant. For some IT licenses, brokers or consultants may be quite successful in going through current licensing, securing significant cost savings. Sometimes also the customer is part of a group of entities, and may benefit from moving licensing upwards in the entities' hierarchy, perhaps in combination with standardizing what software to license.

Terminate for convenience. Most consultancy agreements and also many other IT services contracts can be terminated by the customer for convenience. If termination can be made with e.g. one months' notice, then the vendor is entitled to remuneration during the notice period as if the contract was not terminated. Hence, one should assess what was tasked for execution during the notice period, to avoid excessive claims. Furthermore, the customer should ideally together with the notice deliver instructions for what work shall be done in the notice period. If the vendor has to be paid during a notice period, useful work should be provided. In new agreements, the customer should aim for clauses regarding termination for convenience, but make sure that the clauses really are beneficial. Some clauses actually are providing vendors with rights in excess of what they otherwise would have.

Preserve rights and remedies. Many customers fail to file a complaint in writing within due time when vendors are in breach of contractual obligations. Claims and remedies that would otherwise be available, may then be lost. A rule of thumb is: make a formal complaint first, then negotiate. The reverse, i.e. to negotiate first and then make a formal complaint, is not advisable.

Renegotiate. If a contract does not make commercial sense anymore, the customer may attempt to renegotiate. The best approach is often to explain why the contract is no longer sensible, and which amendments to the contract are required. The vendors are typically more flexible, if the business relationship is not to be severed entirely, if, in other words there is going to be future business between the parties. The alternative to an amiable solution could be that the customer terminates the contract without being entitled to. This could prompt claims from the vendor for damages for lost profits and other losses, and result in a resource-draining dispute. An amiable exit-agreement where the vendor is compensated in part or in full for lost profits may be preferable.