IT chiefs must dump DIY mentality

Strategic sourcing will increasingly be the critical competence of the IT department, writes Julia Vowler

Strategic sourcing will increasingly be the critical competence of the IT department, writes Julia Vowler

IT directors are going to have to move away from the DIY mentality of in-house IT shops and take the more sophisticated path towards buying in corporate IT, according to Adrian Quayle, vice-president at analyst firm Gartner.

Quayle believes IT delivery will increasingly depend on strategic sourcing of a range of IT services from outside the corporate IT department. "There are three big drivers for strategic sourcing," he says. "The first is the arrival of new business models such as the virtual enterprise. The second is that organisations are signing long-term deals with outsourcers that are obsolete from day one and have to be renegotiated straight away. And the third is the increasing need for companies to be able to get to market extremely fast."

These pressures, says Quayle, mean that strategic sourcing will become the critical competence of the IT department.

He believes this will be an improvement on current outsourcing practices. "In traditional outsourcing you negotiated for nine to 12 months and it was assumed in the discussions that both sides could predict what the business would be doing in two or three years," he says. Given the volatility of the global market, it is difficult to predict business requirements six months ahead, let alone several years, forcing companies to build the contract for continuous change.

One of the IT director's key strategic sourcing skills will be the ability to make it clear to suppliers what kind of service is required.

"Outsourcing deals that don't work well are where the outsourcer's and the user's expectations are different," warns Quayle. For example, the user may just want to cut costs, but the supplier intends to do lots of expensive things to improve business competitiveness.

Quayle categorises three types of outsourcing deal. Utility deals are where the user simply wants the supplier to improve IT performance in a clearly definable way, such as running a cheaper, more efficient data processing centre. Cost-saving is the name of the game.

In the second kind of outsourcing deal, users are looking to enhance the effectiveness of their IT. The supplier's value is in having a proven track record in such complex areas as, say, customer relationship management. Costs will not go down, but the business will get a better service than internal IT would have been able to deliver.

The third kind of outsourcing contract is the "frontier" deal, where the supplier gets into bed with the user to create competitive advantage. This involves the supplier sharing both risk and reward - the only true partnership. "People are trying very hard to get such models working. But though the number who have taken it to a conclusion are few, it is a growing area, even though it can be difficult to set up adequate metrics for measuring risk and reward," says Quayle.

In Quayle's experience, it is easiest to set up a shared risk and reward sourcing deal when there is a new company or spin off, where the supplier can take a percentage of the profits. Joint ventures are proving increasingly popular as a means of sharing risk and reward, says Quayle.

Clearly, the more sophisticated and business-critical the deal, the more care has to be taken before entering into such a sourcing agreement. This, argues Quayle, is when the IT director's strategic sourcing skills must be used to the full. "Most businesses do want an internal IT leader," he says. "His role is to be a broker between the business units and the outsourcer."

Quayle advises against trying to formalise negotiations too early. "Don't rush to issue a request for proposal [RFP]," he warns. "Not only can an RFP take up to a year to progress through, but you need to understand what the criteria for success are, or you could end up in a situation where the contract impedes the relationship with the business and the supplier.

"Spend more time working out what you need and want to do, and ensuring that the proposed governance and contract management model is going to work."

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