Putting Strategic Back in Strategic Technology Sourcing

My firm helps corporations negotiate technology contracts - software, outsourcing etc. Recently I was interviewed by a journalist on the use of outside advisers in the technology sourcing/negotiation process. One of his questions was "who  is your biggest competitor?" I responded "Corporate Sourcing/Procurement". But are they not your clients?

Yes  - many are (and use their negotiation skills to beat down our fees!)

But for each of them, there are countless others who think they have enough purchasing scale because of their corporate size, or that technology procurement is no different than other category procured and that they are actually doing a good job.

When the average corporation makes 25-30% gross margins, how can sourcing say they are doing a good job when their software vendors are making 90% gross margin on their annual maintenance? Offshore vendors - supposedly " cheap" - making 45%? For every dollar in technology spend, their peers in raw material or other indirect procurement have to severely beat down those vendors to average out the high margins in technology spend.

As I have written several times, the next few years are a golden opportunity for CIOs to beat down incumbent, utility IT spend from 70% to 30% of their IT budgets. But not with today's sourcing tools, processes and skills.

The average technology sourcing department is outgunned in most negotiations:

a) Most major technology purchases are "life events". A procurement professional may do a major software deal once or twice a year. The vendor sales person does that every day of his life.
b) Most corporate attorneys flit from technology to real estate to employment issues. Technology vendors have a full time battery of attorneys who do nothing but focus on sales contracts.
c) The average procurement process is not tailored to technology categories. Buying software is very different from buying an offshore contract, and is very different from a hardware lease. We have done work with some of the largest, most sophisticated companies. I have never seen one which is top notch around all technology spend. They may procure software well, but then leak around services, or telecomm. Or they get complacent - "We cleaned up telecomm spend last year". Vendors, of course, have specialist sales forces and processes - or at least pre-sales specialists.
d) Most corporations tend to be trusting when it comes to renewals with incumbents - software maintenance, outsourcing contracts.  But very little of the lower renewal sales cost or the continuous improvement which comes from long-term relationships gets passed along by the vendor.
e) Many procurement folks forget that while they may work for a $ 5 b corporation, their total IT budget is likely only $ 100 m - much of that in internal staff salaries. Their IT budget has little leverage against an IBM, Microsoft or Oracle.
f) Sourcing loves the concept of "vendor consolidation". It saves on administration and vendor management effort. That works well around stable product categories. In technology, there is so much churn that such consolidation actually precludes companies taking a hard and broad look at SaaS, open source, third party maintenance and other new category of vendors that provide leverage against incumbents.
g) The average technology procurement professional makes only a third or a quarter of a vendor sales person. And the sales person gets trained extensively, has extensive customer intelligence, and typically has a discretionary budget to do whatever it takes to win accounts..

So CIOs have to level the playing field:

a) Take charge of technology sourcing. In too many organizations it is part of the larger sourcing organization.  It is unique enough and the savings opportunities significant enough to have them work much closer with your IT team.
b) Compensate technology sourcing better and upgrade your talent pool.
c) Invest in technology category specific processes and tools - contract management, RFP engines, asset management, contractor spend management and various others.
d) Judiciously bring in third party advisers - with sourcing, legal or financial expertise to supplement your own staff. I am not saying months of work A good specialist could help with a few days or weeks of coaching, eyeballing RFPs and contracts, due diligence reviews etc.
e) Consider outsourcing at least some of the technology spend to entities which can bring specialists and the tools and processes I mention above - and hopefully many times the dollar leverage you have as an individual buyer.

Sound like a lot of investment?  If you can crunch your utility IT spend from 70% to 60% or 40% of your IT budget, the savings will far, far exceed the investment.

Finally, I have learned from years of working with procurement they are trained to be cynical.  Their reaction to this will be "Vinnie, that is self serving for you to recommend hiring an adviser". My response is similar to the hospital commercial "if you do not get help at Charter, please get help somewhere". Lots of fat to be trimmed.