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IT Contracting: Should it be part of Procurement?

May 24, 2012

This is a question that never seems to go away – and it was posed to me again today by an IACCM Member who asked: “We are urgently looking for a high level differentiation or comparison of the differences and / or structure between the old traditional focus of a Procurement versus Commercial department (ICT focused Commercial and Contracting team).”

This member is dealing with a territorial battle between the CFO (and Procurement) versus the CIO (who owns contract and relationship management resources). Here is my answer. What would yours be?

“Perhaps a good way to look at it is whether the business is more interested in ‘inputs’ or ‘outcomes’. Traditionally, a procurement group reporting to the CFO is focused on –and by – relatively short-term measures of price. Historically, when the main IT acquisitions were bits of hardware and software, that was often a reasonable focus. But in those days, it was largely up to the CIO to have the technical skills to make all the pieces work, to gain investment for updates etc. Procurement got the components. The CIO strung them together and was responsible for the outcome.

But now, IT acquisition is very different. Much of it is about services and solutions. There is far more responsibility on the supplier to deliver results. The CIO department is far less focused on technology and far more focused on enabling business needs through technology. As such, they have to be far more aware of supplier capabilities and they have to partner far more with their suppliers to safeguard performance and business results.

The history of where ‘commercial support’ sits has transitioned several times. In the early days of IT, the IT procurement group tended to be part of the CIO organization because it was seen as a specialist area with unique knowledge. As Procurement matured, and as consolidation, compliance and ‘commoditisation’ became core principles of purchasing, it was common for the IT Procurement group to move to the (increasingly centralised) Procurement organisation (and frequently therefore reporting to the CFO, who wanted to control spiraling IT costs). Today, we are seeing some shift back towards the CIO. However, we are also often seeing a split of function; this may mean that there are IT Category Management Teams in Procurement, responsible for acquisition, and there is a Commercial or SRM team in the CIO organisation, responsible for interaction with key suppliers and for managing the contract and relationship post-award. They may also partner with the Category Team in up-front selection and negotiation.

I think the key issue related to ‘best practice’ is the need for coherent, consistent life-cycle management of contracts and relationships. Whether this is through consolidated groups within a single function, or through connected groups in different functions, is not the most important point. There are distinctions in expertise and IT acquisition and management require different skills at different points in the process. The real issue is a consistent process with clarity over expectations and measurements, management approaches that demand cooperation rather than rivalry.

It is important to recognise that IT has changed and will continue to change. The cloud, mobile apps, continuous evolution of technology, shifting demands from customers and the impact of constantly evolving regulation are going to make the delivery of effective IT solutions an extremely challenging role. Much of that delivery will be through third party partners and their effectiveness and costs will be substantially impacted by your ability to offer them clarity, consistency and appropriate interfaces.”

  1. Jim Struve permalink

    It’s too bad that the situation described is a political battle between two internal groups. It shouldn’t be that way. I think the “what” is more important than the “how”. The “what” is, as Tim says, “the need for consistent, coherent life-cycle management of contracts and relationships.” That’s the outcome or “what” that the business wants. The business should be looking at how best to achieve the “what” by asking the various business unit members to do the “how” to most effectively and efficiently achieve the “what”. In other words, senior management should describe the “what” and task the business units to cooperate to effectively and efficiently do the “how” that delivers the “what”, no matter in who’s domain it is performed.

  2. Pablo CIlotta permalink

    The key point here is, without any doubts, the real need for a professional management style of both, contracts and commercial relationships, even more so now that IT acquisition has been changing recently.
    Setting clear expectations, determing clarity and consistency when partnering with IT solutions and services providers seem to be crucial in this context.
    I cannot agree more with Tim’s view who insists in business approaches much more focused on cooperation and cross-funcional teamwork rather than rivalry between internal departments.

  3. Rod Wade permalink

    The challenge really can be looked at in terms of the interplay at the senior executive level. Our Contract Management group handles all sell-side and buy-side contracting, including IT hardware, software and professional services deals. We work collaboratively with our internal customers to meet their expectations based on aligned contracting strategies (they help define the desired technical and business outcomes and we assure the contract meets their needs and ours from a risk management perspective). In fairness alignment is a bit more easily assured in our org since Contract Management reports directly to the CFO as does our CIO . . . Regardless of reporting lines, when the senior executive team is aligned in both expectations and their engagement within the organization, we are better able to keep a keen focus on delivering to the defined corporate strategy (for both sell- and buy-side contracting).

  4. Arthur Cohen permalink

    I take no issue with Tim’s presentation. But reading his comments one sees the confusing nature of the subject. To discuss this subject properly requires that you define whatever current roles and responsibilities are and where they lie within named departments. It seems to some extent semantics gets in the way of a clear discussion. You may have this same issue with my comments below, although I have tried to structure my remarks to approach the discussion mostly from a roles point of view.
    I have concluded that it is less important where in an organization a procurement activity takes place than how you organize a team to approach IT contracting. How to organize is dependent on two major factors, but I am sure there are other considerations.
    My premise is that it is most important to determine who will be responsible for the outcome; i.e., who will be responsible for results/outcome of the purpose of the procurement and for the implementation of the contract terms after it is signed. In most, if not all, cases such responsibility lies with the CIO when we are considering IT contracting. Another way to look at this is to ask who will be accountable for the ROI or profit resulting from the outcome of whatever the purpose of the procurement; or who will bear the burden to meet the business case objectives that justified the procurement.
    The second dependency, in my mind, is the skill set required to plan for and negotiate the contract terms and conditions required for a successful relationship and outcome. In most cases complementary skills developed in “Procurement” as well as in “IT” (and probably finance and legal) are needed. A major aspect in determining the required skills is the nature of the procurement and its purpose related to the use or project for which the procurement is undertaken. Are we dealing with a commodity buy based on identified specifications, or are we looking at a complex procurement that underlies a significant and most probably complex project.
    Organizing in this way is based on the concept of cross-functional teaming, of which I am a big fan. Once you decide on the responsible person (and I mean a named individual), that person can select team members based on required skills.
    By the way, on the sell-side the approach is startlingly the same. A product manager developing a solution/service for sale presumably has studied the marketplace and can speak for the required terms and structure of the offering; but can that person develop a contract consistent with the way the company operates its business, protects the cost structure and contains legal risk. Contracting and development personnel have developed complementary skills and teaming is the best approach to a best practice result.

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