role-rationalization-and-rate-negotiation-global-life-sciences-industry-major-saves-millionsLife Sciences companies make significant investments in Information Technology (IT) in implementing state of the art applications and systems to support R&D, analytics, decision sciences, clinical trials, and data security/ confidentiality.

These companies outsource their IT operations to multiple service providers, so that they can focus on their core business. Over time, the quantum of work that gets outsourced starts growing and before they know it, they end up contracting multiple IT and BPO service providers with contracts running into multiple millions of dollars per year.

There are various models for companies to engage with their service providers. These may be broadly classified into: resource-based (e.g., Staff Augmentation) and deliverable-based (e.g., Fixed Price, Managed Services). As the organization advances further in the outsourcing journey, and as their suppliers prove themselves and inspire confidence and trust, clients tend to migrate the outsourcing of their routine IT operations (such as maintenance and support of production systems) from a Staff Augmentation model to a Managed Services model, and project work (such as systems development) to a Fixed Price model.

One such global life sciences major asked Neo to review their IT outsourcing spend, and based on the initial findings, targeted one IT service provider’s staff augmentation (Time & Materials) contracts to identify potential savings of at least $5MM.

Neo took a three step approach –

  • Simplify the current rate-card
  • Carry out rate benchmarking for the current roles to negotiates rates and bring them in line with the market
  • Create a governance playbook listing policies and procedures to ensure rate-card integrity

Rate Card Simplification:  As the client’s IT outsourcing operations grew, the client’s rate-card had grown to include over 160 line item/ roles, some of which were duplicates and had multiple rates for the same role. With inadequate governance processes in place, ad-hoc additions and changes to the rate-card led to many inconsistencies.

The first step of rate-card simplification was to build a robust role taxonomy which was based on three key dimensions – a) role grouping, based on primary functional responsibility underlying each role b) skill/ technology category, based on availability of skill set and price-bands determined by economics of the labour market and c) skill level, based on the depth of expertise needed to perform the role.

Six role groups, three skill/ technology categories and three skill levels were created and each role on the rate-card was categorized in to a group, skill category and skill level.

Rate Benchmarking: Neo carried out a rate benchmarking exercise to get the current market rates from both Tier I and Tier II IT service providers for the roles and technologies in scope. This helped Neo create a negotiation strategy on behalf of the client to persuade the contracted service provider to bring their rate more in line with the market. After multiple rounds of negotiations involving not just rate alignment but also reclassification of some skill/ technology categories from low to high and vice versa, an agreement was reached between the client and the service provider on the new role taxonomy and new rates.

Governance Playbook: Neo created a governance playbook consisting of processes and policies to ensure that rate-card integrity was maintained going forward. Checks and balances were put in place ensure that all new roles went through a formal resource requisition process. The playbook also contained invoice verification process to ensure that billing was in line with the consumption of services.

The Result  

The new rate-card consisted of 6 groups, 3 skill categories and 3 skill levels for each of the group and skill category combination. The rate-card was easy to follow and govern with only 54 roles instead of 160.

This initiative was projected to deliver annual savings of $7.5 MM (12%) on an annual spend of $55 MM assuming spend patterns similar to the previous year.

It was able to deliver an additional $2.5 MM over the initial estimates of $5 MM.

An efficiently managed and well governed IT outsourcing operation can save millions of dollars for an organization which in turn can be utilized to fund more projects and build core capabilities.

Aditya Shetye

Aditya Shetye

Manager - Advisory at Neo Group
Aditya is an MBA with over 7 years of track-record in research, outsourcing, globalization.

His areas of expertise include, business process improvement/ transformations, consulting, business development, digital advertising, marketing, branding and product development across FMCG, healthcare and industrial products.

He has global experience having worked, studied and lived in five countries including USA, India, Czech Republic, China and Singapore.

He is also certified inSix Sigma Black Belt
Aditya Shetye