Recommendations to Manage Business Costs in Preparation for a Recession

As inflation hits a 40-year high and stock market valuations decline, many economists agree that a recession is looming in the U.S. While the timing or extent of a recession cannot be predicted, it is important to be prepared and to proactively manage business costs.

The following offers some suggestions for managing technology costs in preparation for a recession.

Strategic Outsourcing

Strategic outsourcing can help focus management bandwidth on core revenue-producing functions and reduce costs by leveraging economies of scale, transforming processes, implementing automation and accessing personnel in lower-cost geographies. As a result, strategic outsourcing can be a great option for refocusing management and reducing costs in preparation for and during an economic decline.

Strategic outsourcing can afford a company the opportunity to leverage the best practices and economies of scale available through an outsourced service provider that performs the outsourced function for multiple clients, which inherently offers a lower cost per unit of service than any individual company can achieve.

In addition, strategic outsourcing can allow a company to:

• transform existing processes to achieve efficiency and benefit from the more mature processes used by first-tier outsourced service providers, which can result in more efficient and reliable service at a reduced cost
• leverage a shared employee delivery model and utilize personnel in lower-cost domestic and foreign labor markets, where outsourced service providers have invested in developing delivery centers and labor pools
• enhance the cost savings and productivity by implementing robotic process automation, which reduces labor costs and increases efficiency; while the development and implementation of robotic process automation can be expensive and time-consuming for individual companies, almost all of the leading outsourced service providers have made substantial investments in robotic process implementation and can implement robotic process automation as part of an overall outsourced solution, resulting in significant savings to customers
• shift fixed costs into variable costs that flex with the volume of services consumed, which allows companies to ramp up and ramp down their costs based on their actual utilization and avoid being stuck with underutilized assets and personnel

In addition to the opportunity to re-focus management bandwidth on core revenue producing functions and to reduce costs over time, strategic outsourcing can also provide certain immediate benefits. For example, strategic outsourcing can offer companies the opportunity to:

• obtain an upfront cash infusion in exchange for transferring certain information technology assets (e.g., server) to the outsourced service provider
• reduce hardware footprint, facilities costs and third-party contracts by transferring them to the service provider or replacing them with assets, facilities and third-party contracts used by the service provider to service multiple customers
• reduce payroll expenses by re-badging certain personnel to the outsourced service provider
• defer any upfront transition or transformation charges through a long-term service agreement for steady state services

For companies that already utilize multiple outsourced service providers, consider the use of a multi-supplier integrator (MSI) to manage and coordinate delivery among the existing outsourced service providers and further reduce costs by eliminating duplicative management costs priced into each service provider's solution. With the market shift in outsourcing strategy from large multi-tower arrangements with a single preferred provider to a best-in-class approach with multiple service providers, many customers are struggling to achieve cost savings due in part to redundant management layers provided by each service provider and services that are fragmented and lack coordination among service providers. This has resulted in the emergence of MSIs that take responsibility for management of the outsourced service providers, eliminate redundant services provided by the outsourced service providers and ensure coordinated service delivery among service providers.

Software License Management

In addition to the cost saving opportunities presented by strategic outsourcing, it is likely that companies can achieve significant cost savings by rationalizing their use of on-premises software and software as a service (SaaS) solutions. When looking to cut costs associated with such software solutions, consider the following:

• Identify essential and non-essential third-party software (both subscription and perpetual), and eliminate licenses that are no longer required (e.g., functionality is non-essential, return on investment is insufficient, there are existing substitute solutions, etc.). While termination of subscription licenses will result in immediate cost savings, termination of perpetual licenses may also reduce the cost of ongoing support, which is generally a percentage of the annual license fee for the software.
• Reduce license counts for any remaining third-party software programs to those that are required to support the business (e.g., eliminate licenses that are not required due to reductions in headcount or which are no longer needed because of reduced business functions or demand).

How We Can Help

If you have questions about managing costs in the event of a recession, particularly expenses related to software and information technology (IT) infrastructure, please contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.