How to identify cost reduction opportunities in IT contracts

ByMartín Vaglio

When an organization sets out to reduce IT costs, the first decisions usually involve limiting investments, postponing projects, or delaying modernization initiatives. While these measures help contain spending in the short term, organizations keep paying the same (or even more) for contracts that go unreviewed for years.

RD’s experience in cost reduction projects for organizations in Mexico, Colombia, Argentina, and Peru has shown that this situation creates optimization opportunities that many companies overlook. Instead of cutting technology capabilities, a vendor sourcing optimization strategy makes it possible to assess whether contracted services, commercial terms, and vendor performance are still aligned with current business needs, enabling better-informed investment decisions based on objective criteria.

Many organizations have found optimization opportunities in their contracts. For example, AB InBev cut its technology services costs by 27% across nine countries without disconnecting a single service, while Coppel optimized its telecom and network spend by 32%. These results show that a strategic review of the contract portfolio can free up resources for new initiatives without compromising operations.

Why do IT contracts get more expensive over time?

Rising costs in an IT contract rarely come down to a single factor. In most cases, they result from changes that build up gradually over the life of the contract. The most significant are:

1. Changing market conditions

Vendors regularly update their commercial models, while new competitors and technologies reshape what the market offers. As a result, software, licensing, connectivity, and managed services may now be available under pricing structures, service levels, or contracting models that differ from those in place when the contract was signed. Without frequent reviews, the organization may keep operating under terms that are no longer competitive.

2. Changes in service consumption

An organization’s needs rarely stay the same for the full term of a contract. Business growth, new tools, consolidated operations, or shifts in demand all change the actual consumption of contracted services. This can mean paying for capacity that no longer delivers value, or having to cover new needs through additional purchases outside existing agreements.

3. Automatic renewals

Many technology contracts include auto-renewal clauses that extend the term under the same commercial conditions unless one of the parties requests a renegotiation within the agreed window. When these clauses are not managed proactively, the organization may renew the contract without checking whether pricing, service levels, and commercial terms still fit its current needs.

The five categories where most savings are found

Although every organization has a different technology portfolio, the projects RD has delivered show that optimization opportunities tend to be concentrated in five categories:

  1. Software and licensing: Comparing actual usage with contracted licenses reveals capacity that goes unused. In many cases, this gap represents 15% to 30% of licenses that keep generating costs without adding value.
  2. Telecommunications: WAN, MPLS, and internet access contracts often offer room for renegotiation, especially when they were signed several years ago. Market changes have allowed many organizations to achieve reductions of 20% to 40% without affecting service continuity.
  3. Hardware and maintenance: Assessing contracted terms against specialized providers or through a market benchmark shows whether maintenance costs are still competitive or whether there are alternatives with a better cost-benefit ratio.
  4. Outsourcing and managed services: Comparing current rates with up-to-date market references helps identify overcharges in contracted services. Depending on the category and scope of the service, these differences can represent 10% to 25% of spend.
  5. Corporate telephony: The adoption of voice over IP solutions has transformed the business communications market. As a result, many contracts signed more than two years ago may still run under models that no longer reflect the alternatives available today.

The AS IS / TO BE process: how the analysis is structured

The AS IS / TO BE process provides a structured view of the current state of contracts and defines the conditions under which they should operate to deliver greater value to the organization.

The first stage is to analyze the current situation (AS IS). This involves consolidating the full portfolio of active contracts and identifying the contracted services, their commercial terms, and the associated spend. In organizations with more than 50 active IT contracts, this exercise typically uncovers 10 to 20 agreements that remain in force outside any centralized management.

With this information, actual consumption is compared with contracted terms to identify gaps between real service usage and the agreed scope. This gap is one of the main indicators for spotting optimization opportunities.

Finally, a market benchmark compares each line of spend with the terms available today. Based on this analysis, the target scenario (TO BE) is defined, setting pricing, service levels, specifications, and renewal models aligned with current business needs.

Shared-success model for IT contract optimization

The shared-success model combines a fixed fee with a variable component tied to project results. The fixed portion covers the assessment, the contract portfolio analysis, and leading the renegotiation process with vendors, while the variable portion is calculated only on the savings actually captured once the agreed improvements are in place. This keeps the investment aligned with the value delivered to the organization and, if the project produces no savings, no variable fee is charged.

In RD’s projects with organizations across Latin America, this model has delivered average savings of 18% to 27%, by optimizing commercial terms, right-sizing service scope, and strengthening the negotiating position with vendors.

When should you start a cost reduction process?

Technology contract optimization delivers better results when it is approached proactively, not only when the budget needs to be cut. Certain signals indicate when it is the right time to start a review and renegotiation process. The main ones include:

  1. IT spend has grown more than 10% over the past two years, without that increase translating into new capabilities for the organization.
  2. More than 40% of IT contracts have gone three years or more without a formal renegotiation, increasing the risk of keeping commercial terms that no longer reflect market reality.
  3. The IT team lacks a centralized view of the contract portfolio, making it hard to track renewals, commercial terms, and optimization opportunities.

A successful renegotiation depends on the quality of the prior analysis, the market benchmark, actual consumption data, and the alternatives available to strengthen your negotiating position.

Are your IT contracts still competitive in today’s market?

Picture of Martín Vaglio

Martín Vaglio

Managing Director & Co-Founder @ RDIT | Technology Strategy | Cost Optimization | Vendor Management | AI, Governance & Transformation | HOLO SaaS
For more than 20 years, he has worked alongside CIOs, CFOs, CPOs, and boards of leading organizations across Latin America to define IT strategies, optimize costs, drive technology transformation, and govern digital capabilities. At RD, he combines strategic consulting with the HOLO SaaS platform to help organizations turn technology into a competitive advantage.

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