According to Gartner, IT departments are relying more and more on external vendors, but their commercial management and negotiation skills may not be keeping pace.
How many IT departments have professionally qualified buyers?How many procurement functions have IT experienced buyers?
Not many remains the unfortunate answer.
An often overlooked area is the field of contract negotiations and procurement. Regarding procurement as something of a dusty, back-shelf function, siphoned off between departments is as perilous to business growth as is the lack of a dedicated procurement function.
There is a fundamental skills difference and mindset between technical IT staff and procurement experts with few organisations successfully harmonising the two when buying IT. The end result is that business needs frequently suffer.
It is well documented that companies without procurement expertise are often exploited by software vendors; cue the ‘supplier-centric’ contract that is as onerous to the buyer as it is commercially disastrous.
These disaster deals are not restricted to upfront purchase price or even maintenance costs, but can manifest themselves in a number of different ways during the build phase or post go live.
This is why the ‘buyer awareness’ should be a valued commodity.
But We Already Buy Well
In terms of our buying expertise, we buy houses, cars and groceries without too much difficulty. So without thinking about it much, we tend to assume we can buy software too, perhaps leaving the legal technicalities to the lawyers and/or just taking the vendors ‘standard’ contract. Again, this can lead to commercial suicide, if not properly negotiated from the outset
We may do this as there is no procurement function to take the reigns, or a poor relationship with procurement. Worst of all a belief that procurement is glorified secretarial work / boring administration. Sadly it’s this myopia which ultimately causes delays and cost overruns. End result: frustration, preventable cost and false economy.
So where do IT PM’s / IT departments go wrong?
- Viewing contractual negotiations as a price battleground to begin with, after which it’s boring detail which burns valuable time.
- In a market of smart vendors good at selling, with inevitable time pressure to go live, the contracts are viewed as important in the beginning but as negotiations drag on, lawyers get involved, attention spans suffer and the end result?
- Missed negotiation points on key service credits
- Lack of exit strategy
- Onerous T & Cs which are at best supplier centric
- IT staff that naturally focus on the technical offerings, often led by the vendor, leaving the many other areas of contract negotiation untouched “Use the lawyers once we’ve got the kit list and price sorted”
- You may be lucky and have a legal team that understand IT detail and negotiating, but this is not their core skill area. It is essential for contracts to be fully legally compliant of course, but contracts also consist of many commercial IT points which can directly impact the delivery quality and timescales of your project, points which are not within the skill set of most lawyers.
- When IT staff, who are uncomfortable & poorly versed at arguing with a voluble and strident sales team of a well established vendor, end up with a poor deal
- The Mexican stand-off: vendors are good at exploiting any gaps between an IT department and a procurement function. IT may perceive procurement as not understanding the complexities or the dynamic of business requirements or what the technical ramifications may be.
The Procurement Edge
Whilst professional buyers do obviously endeavour to get best commercial leverage, they also tend to have a wider perspective, being trained to negotiate on a wide range of commercial factors. Some of these factors have less immediacy but no less importance to the benefits of a ‘go live’ than pure license price.
Factors such as forcing regular review sessions, liquidated damages and penalties, contractualising clear roles & responsibilities, baking timescales in, forcing people to think about requirements, stopping scope creep.
They also have the semi-legal contractual experience, which can reduce the amount of lawyer-time required. Anyone who has been through a painfully slow process with their in-house legal team, and/or with the software vendors lawyers will know & understand the value of this. We’ll come back to this point.
So there are two different skill sets here – IT skills themselves are mosaic and complex, whilst the skills for good buying are entirely different but no less commercially critical; the two should not be regarded as mutually exclusive.
Within the procurement industry itself, ‘transactional’ buying of office equipment, travel, stationery etc is more straightforward than strategic buying of say a CRM system.
This overlap is the key area where many procurement departments fail & the division is problematic; in the worst case, vendors take advantage wherever they find it, and press home a more favourable deal for themselves. This may be in terms of hard price, or in terms of risk exposure.
The end result is that you end up paying more, either when delays occur and your business case benefits are postponed, or in the worst situation where you pay more upfront than you should have.
What’s the solution?
IT itself has become steadily recognised as a key enabler and competitive differentiator for businesses. Deploying the right solutions quickly and on-cost naturally follows, regardless of the size of the organisation doing the deploying.
What’s the End Game?
Essentially this requires a change in general psychology and approach to merging the two departments. IT either need to learn procurement skills which is a tall order in itself or hire a specialist firm to provide IT procurement skills on demand. Ultimately IT would be well-served to develop a better relationship with in-house procurement function. This is been a proven reality time over.
Is There Any Real Benefit?
Whilst these may sound like they are straight out of the ‘Project Success Bible’, they are real
- Cost savings – the obvious one which your CFO will love. It will be argued that ‘we are tough guys, we would have got this anyway’ but at the expense of what else? This is what procurement people specialise in ultimately
- Better delivery- through a harmonised commercial process, where requirements, acceptance criteria, rates and penalties are all part of the mix it does enhance the quality of the vendors delivery.
Whether it’s on a software project, where clear contractuals help the project planning, and the plan may actually be baked into the contract itself. If the contractual structure is complex, e.g. you have a systems integrator and say two software houses, it can easily dissolve into a blame game. Constructs such as tri-partite agreements with Memoranda of Understanding, clear roles & responsibilities are an example of the tools of the proc prof.
If Gartner are to be believed, there is already an inexorable move within the IT industry away from large in-house departments full of programmers, toward a more commercial footing where external vendors are used.
Their established responsibilities are around delivering projects on time, departmental structure, commoditisation of technology and technical skill sets, customer centricity.
It’s your choice whether to develop this area and address the buying – sales dynamic next time your organisation goes to spend some money.
One thing is for sure, all your vendors have.