Squeezing Out Savings from Outsourcing

How does a business pay less for its IT services when it's already getting them at rock bottom prices?

It takes a long hard look at whether it needs to be gobbling up so many services in the first place.

Such an approach was taken by the Royal Mail Group (RMG), which has cut its annual IT spend by 10 per cent by paring back its outsourced services.

Antony Hayes, commercial director for RMG, was appointed a year ago to reduce the £110m the RMG was spending on running its IT operation each year.

Faced with the need to make substantial savings, Hayes said he realised he was not going to make such large cuts by simply renegotiating a lower cost for the supply of RMG's existing IT services.

Instead Hayes initiated a root and branch review of the £1.5bn contract that Royal Mail Group signed with service provider CSC (CSC) in 2003.

Under the 10-year deal, CSC's Prism Alliance, which also includes BT (BT) and Steria (TERI.PA), is responsible for running RMG's datacentres, data networks, voice services, desktop computers, and hundreds of business application systems.

Once every service provided by CSC had been catalogued, RMG assessed which services could be cut back and which high-cost and bespoke services could be delivered more cheaply as commodity services.

"This allowed us to do the cost reduction program using the information we had about the IT operation," Hayes said at The Sourcing Summit, hosted by the National Outsourcing Association, in London yesterday.

"We were looking to remove unwanted costs, switch things off and dial down the service levels to make bigger savings [than getting the same services at a lower price]."

RMG was able to both reduce the number of unnecessary premium and high-cost bespoke services it was receiving—cutting some services altogether and transforming some high-cost services into low-cost commodity services.

"For example, we looked at how much 24/7 support we needed across all of our IT infrastructure and whether we could remove it from low-criticality operations," he said.

RMG was able to cut £11m from its IT opex spend over the last year and, in 2010, it will look to cut a further 20 per cent from it by implementing further cuts to high value and bespoke services.

Additional savings for RMG are being realised by a £1.2bn drive to improve efficiency in the Royal Mail, which Hayes said is underpinned by an improved IT infrastructure.

The group recently provided 27,000 PDAs to allow postmen to record delivery of packages and has been upgrading its automated mail sorting technology.

RMG is also embracing cloud computing, switching to Microsoft's Business Productivity Online Suite to provide hosted email, calendar, collaboration and meeting services.

"There is a larger transformation programme where we are refreshing some of the legacy will give us an opportunity to further drive down cost," said Hayes.

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