If you’ve been doing business with an IT services provider long enough to know their prices, the only surprises should be pleasant ones. Unfortunately, this isn’t always true. Cost management allows you to get the services you need and stick to your budget at the same time. Here is how you can save money on IT contracts:
The Basics of Cost Management
Cost management is the process of identifying and reducing the cost of a product or service. It is value analysis. The goal is to keep costs at a level that will provide acceptable profit margins while remaining competitive in the marketplace.
It minimizes the amount of time and effort an organization puts into understanding its total cost of ownership. Each organization has a different way of defining cost, but there are four basic types:
- Direct costs – those associated with purchasing or producing goods or services.
- Indirect costs – those that you cannot directly trace back to a particular product or project.
- Opportunity costs – what could have been earned if the resources used for a given task were not allocated.
- Intangible costs – those that may not seem obvious but have a negative impact, such as information overload.
How Does Cost Management Work?
This kind of analysis helps organizations know the following:
- What to spend money on
- What to spend less on
- What to stop paying for
- Where to spend money when you have a service-heavy network
- Where to spend less if you have a smaller network or more budget available
Identifying Cost-Saving Opportunities
Sometimes it takes time to identify cost-saving opportunities. You’ll need to be proactive about looking for new deals and discounts. If you find a better deal elsewhere, negotiate with your current supplier.
Before signing any contract, keep an eye out for potentially expensive contractual provisions, such as penalties, late fees, termination fees, etc. These provisions can add up over time. This will lead to significant losses when accounted for over the life of a contract (which could span several years).
Whether the contract is a monthly or annual agreement, you must be careful, follow the processes, and evaluate the contract at least once a year. To begin managing your service contracts, assess your services, create a checklist, and examine costs and services from other companies. Choose a contract that meets your needs so you’re not paying for things you don’t need.
Examples of Cost Management
An IT contract is a legal agreement between a company and its service provider to purchase and use technology and related goods or services. The specifics of these contracts vary, but they should all include provisions that protect both parties. Manage costs by staying aware of things like:
- Warranties on purchased products
- Limitation periods for breach of warranty
- Indemnification if one party causes harm to the other party through gross negligence or intentional misconduct
- Limitations on liability (specifically about the intellectual property)
- Allocation of risk
A lack of knowledge about cost management leads companies to make mistakes when negotiating their contracts with service providers.
The Benefits of Cost Management
Evaluate your spending on an ongoing basis to clarify that you are getting the most out of your IT budget while avoiding overestimation or underestimation of costs.
Cost management helps you identify areas where you can save money.
You’ll also be able to decide how much money is worth investing in a particular project. You will be able to see what kind of return your company could get from the investment. Then you’ll know whether it’s worth cutting back on other areas of spending.
It can also help you see if there are any savings or opportunities for improvement that you may have yet to notice. When you review your expenditures as a percentage of revenue, you may notice that some services provide better value than others. It becomes easier to cut those costs while maintaining adequate service levels.
Save Your Money on IT Contracts Through Cost Management
Technology is a growing expense in today’s business world, but it does not have to be your most significant expense. With the right cost management strategy, you can keep your costs down without sacrificing the quality of your IT services. Save your time, stay within your budget, and make sure you get the technology needed to advance your business.
