Critical differences between IT procurement and legacy sourcing
Integrated solution as a guarantee of competitive advantage
A significant difference in IT procurement is associated with a change in the paradigm of competitive advantage in the conditions of Industry 4.0.Growing competition has increased customer expectations for meeting their needs thanks to high-tech and knowledge-intensive solutions.
To do this, suppliers have begun to combine products and services into integrated solutions that provide a higher total value than the sum of the values of the individual components. Such customized offerings meet the customer's complex needs and are designed based on the interaction of individual components to provide added value.
Let's give a simple example. A few years ago, companies purchased printers, consumables, and technical support as separate products and services to support printing. Vendors now offer 'printing-as-a-service,' providing the entire process and getting paid per printed page.
The added value here is multifaceted – a single supplier responsible for the entire process and able to optimize it, a single contract instead of several contracts (equipment supply and warranty support, purchase of consumables, maintenance), avoidance of storage costs and working time of own staff, etc.
Similarly, technology providers develop customized integrated solutions instead of supplying individual products and services.
Therefore, there are very few commodity categories in IT procurement (e.g., end-user equipment) where the goods are sourced in batches, and only the price and delivery terms matter. Even IT hardware is now being purchased not as a physical object. It transforms into the cloud and becomes an integrated service.
How does this affect the specifics of the procurement process? According to the classic theory of Buygrid, there are three standard scenarios of purchases in business - repeated (straight rebuy), repeated with changes (modified rebuy,) and a new requirement (new task.) In each scenario, the procurement process is relatively standard and explained in our previous posts.
For example, when repeatedly sourcing a product already well-known for its quality and price, the main emphasis is on negotiations, creating competition, and ensuring rhythmic supply.
When sourcing "new tasks" - still unknown for the use of unique objects (mostly integrated and innovative) - the main task is to determine the solution that best meets the needs of the business and a supplier who can implement that solution optimally.
IT procurement increasingly deals with "new tasks" - not necessarily in terms of quantity, but definitely in terms of value and importance to the business.
Traditional sourcing tools do not work here - price competition, fixed scope of supply, fixed time and cost, extensive penalties for delays, etc.
When sourcing "new tasks" - still unknown for the use of unique objects (mostly integrated and innovative) - the main task is to determine the solution that best meets the needs of the business and a supplier who can implement that solution optimally.
IT procurement increasingly deals with "new tasks" - not necessarily in terms of quantity, but definitely in terms of value and importance to the business.
Traditional sourcing tools do not work here - price competition, fixed scope of supply, fixed time and cost, extensive penalties for delays, etc.
A separate sourcing project must be created for each requirement. IT procurement must closely cooperate with internal customers, conduct deep analysis and modeling, choose a supplier based on non-pricing criteria, and more.
This is a very complex and resource-intensive process that requires high qualifications of participants working in a cross-functional team. Notably, almost every project is unique regarding subject-matter expertise and sourcing strategy.
In the IT department itself, such planning is challenging. It is not a single process - it consists of at least five input streams: strategic initiatives, corporate infrastructure, business needs, application development, and industry and regulatory requirements.
In addition, many requirements come to IT procurement directly from the business because IT products and services are used across all business units.
Organizing the process of demand planning and relationship management for internal customers requires a high level of professionalism from buyers and maturity of corporate processes.
This is a very complex and resource-intensive process that requires high qualifications of participants working in a cross-functional team. Notably, almost every project is unique regarding subject-matter expertise and sourcing strategy.
High complexity of demand management
As we know, the procurement process starts with demand planning and analysis.In the IT department itself, such planning is challenging. It is not a single process - it consists of at least five input streams: strategic initiatives, corporate infrastructure, business needs, application development, and industry and regulatory requirements.
In addition, many requirements come to IT procurement directly from the business because IT products and services are used across all business units.
Organizing the process of demand planning and relationship management for internal customers requires a high level of professionalism from buyers and maturity of corporate processes.
IT procurement is ineffective without category management and digital asset management (ITAM)
Unlike many other categories, the IT category cannot use only traditional purchasing logic, i.e., the lowest price. That is why public procurement in this category is complicated and ineffective.It is necessary to use the toolset of category management - in particular, the analysis and standardization of technical requirements, the development of long-term strategic relations with selected suppliers, and the choice of "make or buy" scenarios.
For example, in-house development can satisfy many requirements, but category managers have to prove a particular scenario's economic feasibility.
Another pillar of IT procurement should be digital asset management (ITAM - IT Asset Management.) Accounting for digital assets (licenses, servers, users, data) makes it possible to set up efficient sourcing.
The basis of professional IT procurement is not only a negotiation but an inventory and planning of digital assets.
The primary source of unnecessary costs is not overpayment but the ordering of digital licenses in an inappropriate quantity, non-use of the ordered licenses, or illegal use (piracy or royalty-free - in both cases, intellectual owners can initiate hefty fines or court cases).
Inventory and data protection is also a mandatory element of asset management and an integral part of the procurement process.
Let's summarize:
- IT procurement mainly deals with integrated services and innovation,
- IT procurement manages various end-users (not just the IT department,) which makes the demand planning and analysis highly complicated,
- IT procurement requires efficient digital asset management since most value resides in utilizing IT assets.
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More information on this and other exciting topics can be found in "The Technology Procurement Handbook." It represents 23 years of experience, billions of dollars worth of successful sourcing projects, and 1000s of hours spent on research, analysis, and content creation for the most demanding professional readers.
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