Outsource Magazine

My article 'Why is sourcing becoming a priority for the CIO office?' shared the drivers for the emergence of strategic sourcing departments within IT. Did procurement fail to understand the CIO needs or was that a gap within IT that was identified to meet the changing expectations? Before making any conclusions, it is critical to understand the historical need for procurement and the value it brings forward.

The traditional procurement organisation has been maturing over years

Procurement increased in maturity over the last century although there are significant variations in how firms leveraged the function. Until the 1980s, purchasing was mostly supporting clerical tasks - procuring goods, supplies and services needed at the best price. Fueled by momentum in the technology revolution, in the 1990s procurement started transforming from being “manually intensive” to a more “strategic and automated” function. Procurement was well integrated into driving corporate needs and influenced key decisions as part of the CEO’s management council. The later 1990s and early 2000s saw the rise of supply chain management (SCM) and enterprise resource planning (ERP) technologies; changing the trend from traditional materials requirement planning (MRP) systems and giving a new spin to just-in-time (JIT) procurement. Adoption of new technologies across the enterprise imposed the need for procurement to become more integrated with the overall organisation.

Rapid transformation has imposed new expectations on IT departments to deliver

The economic recessions of 2001 and 2008 have seen the accelerated adoption of technology and put new expectations on the IT departments. The pace of transformation has been so rapid that IT departments got caught off-guard to support changing business expectations. The technology skills required changed rapidly and there was a growing need to procure services that required building complex eco-systems of global vendor partners who can provide “true solutions” versus “commodity” services to help IT deliver time-critical projects.

Agility, rapid execution and global sourcing have emerged as some of the key transformational themes in IT departments as they struggle to find the talent to execute complex projects. Mature IT departments knew that rapid transformation would need to evolve new capabilities within IT. While cost reduction was still important, the services CIO needed asked for several additional components: strong understanding of the business, innovative sourcing abilities, rapid behavioural change management and stronger vendor partnerships. These abilities were best addressed by the creation of strategic sourcing or similar organisations within IT.

The changing face of global sourcing and the role of procurement

Traditional procurement departments were not designed to understand business needs. They were designed to be operational entities to process commodity-based repeatable purchases of products and services. Procurement departments addressed the critical need to reduce cost and would typically leave the determination of business needs, quality and other expectations on IT.  Global sourcing of services offered tremendous savings due to labour arbitrage. Initially, the focus on getting the same or a better level of quality when leveraging a vendor from global locations became an important consideration and cost saving was expected anyway. As firms matured on their understanding of global sourcing, they realised that there is more to cost equation than just labour arbitrage.

Especially in the current economic environment, cost is again becoming a critical component in globally sourced partnerships and procurement has a very important role to support the needs of global sourcing programs. As global sourcing matures, even though several services are seeing rapid commoditisation, the complexity, rapid execution and agility expectations from IT departments are putting pressure on procurement to work closely with strategic sourcing and support the changed focus from the “how” to “why and what” aspects.

Procurement departments are investing in building relationships with strategic sourcing

CPOs (Chief Procurement Officers) who understand the global sourcing phenomenon that is now impacting the industry are actively looking into training their teams, enhancing processes and rapidly deploying technology to support their clients. They are aligning with the strategic sourcing departments (or equivalent) as key clients and working with them as a team to address the global sourcing needs. The picture below depicts the handshake between procurement and strategic sourcing across several sourcing categories.

Procurement continues to add value in several areas in alignment with strategic sourcing

The role of procurement in contributing to sourcing decisions varies depending on the needs, executive support, mandate, and process and technology maturity. While procurement still has a significant role to play with purchasing services, the skills required to understand the services are best supported from within IT.

Procurement has been seen to be taking ownership in areas of contract administration, negotiation and relationship management when the nature of needs is commoditised. In specialised areas like SLA-driven managed services, R&D, product development etc there is a need to keep global sourcing relationships closer to the business due to their impact on customer satisfaction. Strategic sourcing departments are best positioned there to add value while leveraging procurement services as back office wherever feasible.

Mature procurement departments are establishing processes and deploying technology to provide visibility into end-to-end spend and sharing understanding of cost components of the spend based on historical data. Procurement departments today provide several services:

• Spend visibility and forecasting.
• Vendor selection and enablement.
• Enabling RFx process.
• Providing critical research and data in supporting pricing decisions.
• Contract negotiations in working with relationship owners and legal.
• Operational aspects from buying to payments.
• Contribute to value analysis on spending.
• Automating processes related to above by deploying technologies (e.g.: data management and trend analysis, contract management, bidding by auction and procure-to-pay processes).

The future might see the merger of IT procurement with strategic sourcing

It is critical for procurement departments to mature and continue to add value. Procurement continues to be a strategic function as it directly ties into any organisation’s cost of goods sold (COGS) and provides several critical services in area of contract administration and negotiations. Will the future see merging of IT strategic sourcing and IT procurement? As procurement outsourcing gains pace and procurement experiences global sourcing first-hand in addition to working with strategic sourcing, it might be the trigger for the two service portfolios to come together. In some organisations, the future might see the merging of strategic sourcing and procurement as a single entity supporting IT with common service catalogues and objectives. Ongoing transformation that is driving the need for consistency and consolidation might accelerate this in future. It will have to be seen with time as there could be several views on this question and different firms might review the decision in light of what adds the most value to them.