IT Services Outsourcing Cost saving: Whats are easier then Hows?

Clients outsource IT services (typical run activities) for non-core applications to reduce the (SG&A) cost of providing the services to Line of Business. Off late clients are not just happy with the initial cost savings that may accrue to the business due to outsourcing of these services, they often demand that the service provider come-up with initiatives to reduce the year-on-year cost systematically over the duration of the deal. Service providers embark on such initiatives to reduce y-o-y costs starting right after the services are transitioned to a service provider. Typical questions that one often ask at this juncture are:

1. How much cost savings can be committed to y-o-y?
2. What are the levers one can deploy to reduce the y-o-y cost?
3. How will the initiatives be run around to reach target yo-y savings through each lever?

To answer the 1st part of the question, it has been observed that any the industry wide y-o-y cost saving cannot exceed 25-30%. The reason for that range is that anything at the higher end of the range affects the stability of the engagement to a layer that it makes it unsustainable.

To answer the second part of the question, there are 3 broad areas we can consider:
1. Arbitrage lever: For example Increase the Offshore % citrus-paribus (an economic talk!)
2. Resource Productivity lever: reducing the number of resources required to perform the service. This can be further broken down (reserve my USPs here...you need to pay me for this!)
3. Resource-mix lever: Getting to do more of the activities by junior resources who cost less.

Answering point 3 is the most difficult. The reason the initiatives that are rallied around these levers for y-o-y cost savings are highly subjective to the following:
A. Deal context (the initial engagement beginning parameters for the levers)
B. Organization context (both the client, and service provider dynamics)
C. IT Landscape context (services, applications, technology...etc.)
D. Other extraneous factors (blame it on the economy)

One may claim to achieve y-o-y savings through the jargon galore if the one does not appreciate the factors contributing to the subjectivity: standardized processes, skill development a.k.a ongoing training, lean, six-sigma, server-queue modelling, well i'm running short of those. We will discuss more of these later.