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IT Supply Faces Rapid Change

September 13, 2010

Outsourcing, software as a service, mobile devices and now cloud computing …  the world of information systems and telecommunications has moved at a dizzying pace. But for those who are charged with negotiating and managing supply relationships, the changes look like they are only just beginning.

When I was last involved in detailed negotiations for technology equipment, it was in a world where customers still regularly signed ‘selection and use criteria’ – that is, suppliers sought to disown responsibility for actual performance beyond the standard specifications. Yet already this attitude of ‘let the buyer beware’ was under challenge and the meaning of expressions such as ‘fitness for purpose’ was a lively debate.

Today, a variety of pressures have forced that discussion into new realms. In seeking to escape the commodity trap, many suppliers switched to offering services, which over time required much more specific performance undertakings and guarantees of outcomes. And it is this which is providing a very real challenge for both buyers and sellers.

In the old world, Procurement was the champion of commoditization. This was seen as a powerful methodology to drive down prices. And it worked – so long as what you wanted was an input. It does not work if what you want is a guaranteed output or outcome.

In that same old world, sales contracting professionals were taught to limit commitments. Their job was to contain risk – to counter-balance the potentially dangerous claims of their colleagues in Sales. This ‘internal contention system’ is also no longer appropriate.

In the past (and in fact mostly still today), contracts negotiators enter into a tribal dance, often involving third party experts who enjoy the lengthy dialogue and extended decision processes. Often these debates focus far more on the consequences of failure (liability, indemnity, get-out provisions etc) than on the real issue – which are how to support success. Risks are contained, not managed. (And if you don’t believe me, just look at IACCM’s annual study of the ‘Most Frequently Negotiated Terms’).

Today, things are changing. CIOs are under far greater pressure to deliver results; they are judged on outcomes because information systems and communications technology lie at the heart of corporate strategy, competitiveness and survival.  Their dependence on technology service providers therefore demands far greater commercial skills and far better instruments to select, define and oversee supply relationships.

So how well equipped are customer organizations to address these changes? IACCM recently launched a survey to find out. Early results show that there is a wide awarness of the need for change – but a mixed picture in terms of progress. A brief summary of some of the findings includes:

  • Overwhelming agreement (94%) that conditions are changing and that commercial capabilities are becoming more important
  • General feeling (75%) that there is an overall need for improvement in current skills
  • Most on the buy side see an absence of necessary skills within the CIO organization
  • Most on the buy side feel that Procurement offers the skills required by the CIO (although recognizing need for improvement)
  • Those on the sell side perceive more commercial skills in the IT department than in Procurement (opposite of buyer’s view)
  • Sellers have major concerns over the ability of customers to define requirements
  • The big shift in selection criteria relates to on-going delivery and performance capabilities – far less based on point of purchase, far more on commitments and demonstrated capabilities to perform, readiness to ‘partner’ to deliver results
  • Clear implication that suppliers must show greater readiness to commit outcomes and demonstrate their ability to deliver on promised performance
  • However, buyers must then recognize the need to manage requirements more effectively, to stay engaged and to recognize that ‘partnership’ is a two way process

Overall these findings support the need for increased ‘supplier relationship management’ and the importance of improving the commercial and relationship competence of both buyers and suppliers, to ensure continued adaptability in the face of rapid technological change and partnering to ensure that business results are achieved.

The implications of these findings include the need for buyers to become more objective and holistic in supplier selection; for suppliers to show greater integrity in their sales commitments; for pricing / charging models to place value on  supplier quality, the depth of commitments and demonstrated capabilities; and for focus on governance and change procedures based on rigorous assessment but also a commitment to work together in ensuring performance.

You can benefit from access to the full report by participating in the survey. It takes no more than 5 minutes and can be accessed at https://www.surveymonkey.com/s/ITProcurement

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