IT sourcing complexity makes supplier management a priority

analysis

IT sourcing complexity makes supplier management a priority

Karl Flinders

IT supplier management capabilities are becoming business critical as the correlation between IT and business performance strengthens.

At its recent Architecting Tomorrow’s Business Outcomes conference in London, Forrester Research ran a series of events aimed at sourcing and supplier management professionals.

The proportion of IT outsourced to third parties will only get bigger and more complex as new technologies, delivery models and suppliers come to market with technology to address business challenges, which means procurement departments must ensure their IT sourcing policies meet business goals.

Despite a high level of maturity within businesses, there exists a contradiction: IT service providers are doing what they are contracted to do, but many customers are dissatisfied and do not think they are getting what they expected.

IT services contracts and expectations are misaligned

Recent research from Forrester revealed that 69% of sourcing executives are not satisfied with their IT services. “They do not think the suppliers are delivering what they want,” said Forrester analyst Lutz Peichert.

This is driving a huge rise in renegotiations of existing contracts, and in extreme cases businesses are bringing outsourced work back in-house.

“But it is not that the supplier is not delivering, but the contract does not reflect the reality,” said Peichert.

He said the current surge in renegotiations is the result of businesses trying to adapt contracts to fit the reality, adding that long-term contracts often fail to deliver what is expected: “If a contract is five years old it might not match the reality any more.”

One of the consequences of dissatisfaction with IT services arrangements and the subsequent renegotiations is an increase in multi-sourcing. The digitisation of business is another trend that is bringing with it a trail of new suppliers. Sourcing executives now have more choice – but they also face a bigger challenge selecting the right partners.

Once selected, the challenges continue, with the management of multiple suppliers and their interactions a complex task. For example, Peichert said one large business he has dealt with has 18 people managing four cloud suppliers.

As a result of this type of scenario the management of service providers is becoming increasingly outsourced itself. Peichert said service integration, as it is known, is not a new concept, because multi-sourced environments have been run for years. But he said there is an increase in outsourcing service integration.

The digitisation challenge

Digital disruption is opening the eyes of businesses to alternative sources of IT supply.

New technologies around areas such as cloud, mobile and business intelligence add complexity to sourcing. According to a Forrester survey of global sourcing executives, 65% said they are excited about the changes that digital technologies will bring, but 62% said the business lacks the skills to make the change and 68% said they don’t have the right policies and business practices.

Forrester analyst Liz Herbert said supplier management teams need a new approach if they are to harness the skills of a plethora of often little-known suppliers.

She said businesses have to change the rules of engagement with suppliers by rebalancing risk and value. She said some partners should be fast-tracked if they see them as strategic partners in the future.

Businesses can also benefit from taking an Appstore approach to procuring software, said Herbert, and cited the UK government’s CloudStore as an example.

Software status quo needs to change

Savings and efficiency improvements can be made if a strategic approach to software sourcing is taken

Duncan Jones, Forrester

It is not just new technologies that provide both challenges and opportunities to sourcing teams. Core software from large software suppliers underpin businesses. Savings and efficiency improvements can be made if a strategic approach to software sourcing is taken, according to Forrester analyst Duncan Jones.

Jones described the four software giants SAP, Oracle, IBM and Microsoft as “technoligarchs”, saying they are impossible to ignore and are aggressive at driving business that their customers cannot afford. 

“We need the technoligarchs’ great products, but they need more revenue than we can afford to pay," he said. “Any company that thinks it can go independent of these suppliers is probably kidding itself.”

He said businesses cannot use standard procurement tactics when dealing with these suppliers: “Traditional approaches are very transactional and reactive and not the best way of doing things.”

A key part of procurement tactics will involve deciding which suppliers you want to commit to and rewarding them appropriately, said Jones. For example, he said businesses should tier suppliers, with the benefits and commitment for both parties rising with the ranking.

“The higher up you are as a supplier, the more benefits you get, but the higher the obligations," said Jones. "For example, they cannot be a strategic partner if they audit you and charge you for some spurious interpretations of vague licensing agreements. If they want to be a partner, it means fair treatment.”

He also said procurement teams should identify the suppliers it wants to do more work with in the future.


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