Creating Liquidity by Right-Sizing Tech Costs
In a time when liquidity is crucial, managing technology and telecommunication costs can free up cash flow without impacting your organization’s productivity.
Digital Exclusive - 2020
As businesses continue to cope with COVID-19’s economic disruptions, market upheaval, and civil unrest, liquidity has become a major concern—and the difference between succeeding and folding. Many organizations are asking, what can we do to free up cash flow now?
Some middle-market companies have decided to cut their largest cost—employees—by implementing layoffs, furloughs, and salary reductions, but there are downsides, such as damaged morale for remaining employees and the loss of institutional knowledge. But there may be a better option for companies looking to reduce costs and increase cash flow without losing valuable human capital or other strategic advantages.
Two high-cost areas for middle-market companies are technology and telecommunication. Software, hardware, subscriptions services, support, maintenance, internet, data, wireless, videoconferencing, and phone costs can add up to 7 percent of a company’s total revenue. Because of the sophistication of these services; the difficulty in tracking the inventory; and the complexity of the billing, technology and telecom spending often carries a lot of inadvertent waste and should be one of the first places companies look when they want to cut costs. By just eliminating wasteful and unused technology and telecom services, companies can reduce their costs by 15-25 percent annually.
With the possibility of such significant savings, companies should take the following steps to ensure their technology and telecom spending is effective and efficient:
First, analyze vendor contracts and the latest invoices. To limit the scope of this review, set a materiality threshold based on annual spend (e.g., over $50,000 per year). Be sure that you have complete
versions of the executed
vendor contracts (including all addenda and exhibits)—in other words, do not rely on partial contracts or unexecuted drafts of the contract. If necessary, request a complete copy of the contract from the vendor. The most important information that should be obtained from the contract and invoice review includes:
Vendor spend amounts
A rough estimate of annual spend by vendor can be quickly obtained by running an accounts payable report for the trailing 12-month period. However, the latest vendor invoices should be reviewed to determine the current
spend amounts as they may have changed during the trailing 12-month period.
Contract expiration dates
Determining the contract expiration date is a little trickier because the exact date may not be discernible from the contract because the company is beyond the initial contract term; the commencement date is unknown because it is tied to an unknown implementation date; or the commencement date is stated in another document, such as a purchase order or statement of work. Consequently, the latest vendor invoice is the more likely place to find the contract expiration date; otherwise, the vendor can be contacted to confirm the expiration date. Note that some contracts may have multiple
expiration dates resulting from different services (like software modules) being purchased from the vendor at different times. In such cases, request the vendor to put all the services on the same contract term to simplify and streamline contract management, invoice validation, and payment processes.
The contract should state if the contract expires at the end of the term or automatically renews unless terminated by either party. Since most contracts have auto-renewal clauses, the auto-renewal date is the key date you want to get ahead of from a vendor negotiation standpoint.
In our experience, the quickest savings opportunities are with:
Technology and telecom services not under contract
These services are the lowest hanging fruit for cost reduction and therefore should be addressed first. Typically, the company will get much better rates from its vendors if it agrees to enter a contract for a certain term.
Contracts expiring or auto-renewing within the next 90-180 days
All technology and telecom contracts in this category are ripe for renegotiation, but start with the higher cost contracts as they are likely to take more time to negotiate with the vendors. In determining when to start negotiations, consider the time it would take to implement the service with a new vendor if you are unsuccessful in negotiating the desired contract changes with the incumbent vendor.
Larger technology and telecom contracts, regardless of expiration date
While negotiating contract changes during the contract term can be challenging, there are reasons to do so. A change in circumstances for the company (like layoffs, office closures, or business downturns) or company leverage (like being a long-time customer, a high-paying customer, or a vendor reference) can be grounds for revisiting contracts. While some contracts may allow for license or service reductions, most do not, so negotiations will be necessary to lower costs. As a condition to reducing pricing, the vendor will probably require an extended contract term or other consideration which may be a worthwhile trade-off.
While first addressing the higher cost vendors makes a lot of sense, also look at the services provided by your lower cost vendors to see if any of these services can be consolidated with one of your larger vendors to take advantage of the company’s purchasing power, or eliminated due to low adoption rates among staff.
When negotiating contracts with vendors, we have found that the following three data points are the quickest and most effective ways to achieve short-term savings:
Review pricing terms
The pricing terms for the services in question should be compared to the market rate. If the market rate is unknown, obtain bids from at least two competitive vendors. Each vendor should be given the same requirements so the company can perform an apples-to-apples comparison. Be sure to ask for multi-year pricing from the vendors as pricing should improve as the contract term lengthens and the risk of annual price increases will be eliminated. At a minimum, you will be able to use this market information to get better pricing and contract terms from the existing vendor.
Review payment terms
If the contract provides for monthly or quarterly payments, you should be able to get price concessions by paying annually in advance or prepaying for the entire multi-year term. If vendors are requiring annual payments in advance, you should request that these advance payments be converted to monthly or quarterly payments (without a vendor upcharge) to improve cash flow.
Review utilization reports
You should review any available utilization reports to determine which technologies and features are actually being used by employees. If unused or underutilized technologies or features are uncovered, this information should be leveraged to reduce vendor pricing. The goal is to buy only what you need based on historical consumption and forecasted future usage—but be cautious in relying on historical usage as it may not be a reliable indicator of future consumption as workplaces change to accommodate the “new” normal.
By following these steps, you will not only maximize short-time cash flow but also put your company in the best position to be sustainable and profitable for many years to come.
Mark Friedman is the chief optimization officer of Telergy LLC, a Chicago-based cost management consulting company helping middle-market companies, including accounting firms, reduce and control their technology, telecom, and energy costs.