The current population of CIOs is, in general, significantly more professional and well-informed in its approach to procuring and managing service and supply. CIOs need to be because the days of the unintelligent customer are long gone, and suppliers have to work hard for their money.
Internal and external sourcing has gone through three or four generations of re-evaluation and competition. Most CIOs preside over a complex mix of internal teams, external providers and commoditised services. All are adept at complex integration of systems and solutions, and they have a clear delivery plan for a known set of stakeholders. Given this picture, It comes as something of a surprise to realise that CIOs are potentially missing out on up to 40 per cent cost savings on their organisation's IT services contracts.
It initially appears that the UK public sector has made great strides in achieving effective mechanisms to procure goods and services. There are a number of key cross-government procurement frameworks where buyers can take advantage of pre-arranged, cost-effective pricing for a given subset of goods or services. Major departments have put in place similar frameworks to ensure complete coverage. The private sector has long had a strong focus on procurement, with specialists assisting at corporate level to ensure best value from suppliers. Strong category management and price awareness have generated a competitive environment.
There are, of course, still problems to overcome. If a key supplier, with intimate knowledge of your business mechanics and unique insight into your needs, fails to jump the procurement hurdle, there is all too often an unexpected drop in service efficiency or increase in overall cost. Supplier or service evaluation is slow and often scored in minute detail; suppliers spend more time working out the marking system than they do in engaging with you to determine the main priorities.
Procurement teams do not regularly look at what the supplier is doing, paying full attention instead to business references and visiting other clients; most business teams will say there simply isn't time. People are afraid of making innovative decisions, and this often translates into a fear of choosing a new supplier. There is a tendency to go for the big name or the accepted face.
Suppliers have often committed to a rate structure for the lifetime of the supply, often with limited, if any, ability to increase due to business changes. These problems are currently understood and, to a greater or lesser extent, they are being addressed by both the buyer and supplier communities. Solving them is important but they alone are not the answer. The major problem is more fundamental and requires a change of approach from today's CIOs.
Becoming more effective in IT service procurement and management is applicable both to the public sector (given Treasury directives to cut costs and improve efficiencies) and to the private sector (impacted by the effects of the recession).
In the private sector, the demands for increased commercial competitiveness are driving innovation in IT services, generally at a high cost - however, the weak market and desire to cut costs often leaves CIOs with one hand tied behind their backs. The Office of Government Commerce recorded that the public sector spends over £100bn each year on procuring goods and services and, even though they are required to demonstrate full accountability for their actions, there is much wastage.
In a mature service environment we see interaction between a host of drivers: cost, efficiency, micro- and macro-politics, long-term and short-term ambitions, expediency and sustainability, internal sourcing of resources and outsourcing. Sometimes it's hard to see the wood for the trees.
The need to integrate and streamline systems, processes and multiple suppliers has created a number of problems. Software suppliers have become adept at provision of apparently seamless integration, but at the expense of locking out competition. Technologies have emerged to enable software integration via standard protocols, although these are often applied by in-house teams or specialist subcontractors. Outsourced solutions have driven bundled, opaque pricing and management by service level agreements, and suppliers protect their own patches from rivals.
Tips for smart procurement
Existing solutions are frequently too complex and constraining. This has led to duplication of effort, or has resulted in implementing technology that is not fit for purpose and is inefficient. Fixing one part of the web tends to break another part. Driving cost out has a positive effect immediately but also a negative effect as outsourcers accept the pain and adopt defensive approaches. Breaking things up into bite-sized lumps never seems to achieve a long-term effect.
So what should you do? In your approach to procurement there are some good guidelines, including the following:
Where a supplier is clearly going to get the work, don't waste money on procurement. Artificial competition is pointless.
- Ensure procurement and business buyers- engage early.
- Remove your dependency on key suppliers and move to a position where effective competition is feasible.
- Try to commoditise services.
- Put at least as much time into reference visits and seeing what the potential supplier is really doing with other clients as you do to scoring and marking.
Also, in order to transform your service provision and realise cost efficiencies, you should consider the following steps:
- Review the value you are receiving from outsourcers and insourced services. Do it holistically: the Department for Work and Pensions realised £2bn in benefits as a result of embarking on a transformation programme following a benchmark review.
- See the potential of high-impact projects or advice that can generate short-term savings, which can in turn be used to fund sustainable long-term benefits. Ensure the business sees this value.
- Avoid merely maintaining the status quo with suppliers and, instead, look at ways to make some fundamental changes in the ways that IT services are procured.
- Create a healthy tension with services providers to provide long-term benefits for both sides. If suppliers take less revenue, work with them to improve service, helping to maintain or improve profitability.
Don't get caught by conflicts of interest between internal services and those provided by outsourcers. This is often counter-intuitive: we do not expect our doctor's advice to be based on theory alone, we expect our doctor to be an active practitioner and the advice we receive to be informed by work done in the field. Why, then, do we feel there is an issue working ‘client-side' or ‘supply-side'? All too often it is an artificial issue, a throwback to days long gone when little governance over the procurement cycle existed.
Finally, be bold. Difficult environments must not stop the growth of innovation. Innovation applied correctly can transform an organisation's ability to deliver better IT services at a vastly reduced cost.
About the author:
Neil Malpas is operations director for FTSE 100 services firm Serco's consulting division, and an expert in the procurement and delivery of large business programmes for blue chips and government