Daimler bringing IT in-house but offshore reflects high cost of software support

Daimler is the latest corporate to announce plans to bring IT that is currently outsourced back in-house. The firm’s announcement follows similar plans from fellow manufacturers General Motors (GM) and Procter & Gamble.

Daimler is planning savings of €150m a year. A chunk of the savings will come from taking SAP support in-house by setting up a low cost captive in Bangalore.

Forrester analyst Lutz Peichert told me there are a lot of big companies looking at the possibility of bringing IT back in-house because there is general dissatisfaction with suppliers. He also said offshore is now a standard part of the supplier landscape for large corporates so more in-house captives could be on the cards. Back in February I wrote about how there could be more and more big businesses are setting up offshore and nearshore captive centres as regulations, fears over IP security, and hidden offshore costs increase.

Software from the likes of SAP is critical but is expensive and cists can spiral out of control. Daimler’s decision to set up a low cost captive to support its SAP reflects this.

I was at the Forrester forum this week and attended many of the outsourcing presentations aimed at supplier and vendor management professionals. There was an interesting presentation from Duncan Jones about strategic software sourcing.

He described the four software giants SAP, Oracle, IBM and Microsoft as the “technoligarchs”. He said businesses need their software because it is good but these suppliers want bigger revenues than customers can actually afford to pay.
He said by managing them strategically businesses can make massive savings.
It appears you have to threaten or punish these suppliers to keep your maintenance costs down.

At the Forrester event there was a presentation from Rimini Street. The company offers businesses maintenance on Oracle and SAP with the promise of doing it for half the price charged by the software suppliers. The CEO said about 30% of the companies that approach end up switching to its support. But the interesting thing is the other 70% then go to the likes of Oracle and SAP, show them what Rimini Street has offered, and end up getting a better deal. So it seems you need a good bargaining tool when it comes to negotiating with these powerful suppliers.

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 reward then 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.”

“For example they cannot be a strategic partner if they audit you and charge you for some spurious interpretations of vague licensing agreements,” said Jones. “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.