First get a strategy, then manage suppliers

What is the difference between a sourcing strategy and good supplier management?

What is the difference between a sourcing strategy and good supplier management?

First principle: get a handle on core IT competencies

Chris Potts, director at Dominic Barrow

A sourcing strategy establishes the key business principles for deciding who the company will use for a given IT competency, product or service.

It will also propose and implement any core tactics needed to embed these principles into the company's day-to-day decision making. It encompasses both internal resources and external suppliers.

The first principle of any strategy is that you cannot outsource core competencies. So if your company's core IT competencies are not described anywhere else, a sourcing strategy needs to explain what they are and who has them. Many a sourcing strategy has struggled because the company ignored this first principle.

Supplier management is a subset of the sourcing strategy, where the source is an external supplier - although internal "suppliers" of IT are increasingly being regarded as quasi-suppliers as well. Typically, supplier management implements the company's key tactics in respect of a single supplier. These tactics will take into account the value-for-money of the supplier's products and services, their delivery performance, future strategy and exposure to risk.

Framework and direction versus process

Gill Williams, partner in Ernst & Young's information security practice

Sourcing strategies and good supplier management are different but inextricably linked. Sourcing strategies provide a framework and direction for selecting suppliers (internal or external) of products and/or services, whereas supplier management is the process which ensures that the suppliers of these products or services deliver the agreed value to defined performance standards.

Sourcing strategies (which involve the evaluation, selection and contracting of IT products and services) can use a variety of models, from the external procurement of a range of IT products and services, outsourcing or co-sourcing arrangements or a decision to develop or deliver products and services in-house. Within these models there are even more variations on a theme, such as multi-sourcing or prime contractor. However, no matter which model is adopted, sourcing strategies must be aligned to business and IT goals.

Supplier management involves the definition and deployment of valuable sourcing relationships that make use of the optimum organisation and governance structures, deliver service levels and key performance indicators, and utilise effective tools and techniques for assessing IT supplier performance.

This should be managed within the context of the rules set out in the contract (if it is an external supplier), which serves to emphasise the importance of getting the best contract negotiated. Both areas are complex and require skill and experience to navigate through a variety of issues and business impacts.

Supplier management is a component of strategy

Andrew Davies, visiting professor in IS, Cranfield School of Management

The difference is simple: good supplier management is an operational capability that is a component of the successful implementation of a sourcing strategy.

A sourcing strategy is an overall view of the organisation's approach to the provision of IT equipment, software and services. It will cover such areas as:

  • In-house versus outsourcing

  • Selection criteria

  • Procurement

  • Supplier management.

To develop a sourcing strategy, the organisation will want to consider issues including:

  • Access to skills, competency and experience

  • Maintenance and development of knowledge of the organisation

  • Cost

  • Flexibility - the ability to respond to change and the speed of response

  • Risk, such as supplier failure or cost overrun

  • Controlling provision.

A successful sourcing strategy will be based on providing an approach to sourcing that supports the overall business strategy of the organisation, ensuring that the right mix of skills, knowledge and experience can be supplied to deliver IT functionality that enables the organisation's goals to be achieved.

Consider ownership and delivery of IT infrastructure

Roger Rawlinson, NCC Global

A sourcing strategy considers how the applications portfolio and IT infrastructure are to be delivered. Considerations for ownership will be defined. For example, a sourcing strategy will consider the merits of in-house managed systems or partially or fully outsourced systems.

Architectural principles will also be defined, such as whether to adopt a best-of-breed or enterprise resource planning approach for the applications portfolio.

Supplier management is the implementation of the sourcing strategy; it is managing the suppliers of your products and services though an agreed contract.

Key areas that need to be defined are the boundaries of the provision; support and ownership of hardware and software; user support and training; technology refresh; interfaces with neighbouring systems; exit arrangements; and performance guarantees.

You should determine your sourcing strategy and then implement this strategy through your supplier management arrangements.

Read more on IT supplier relationship management