After the purchase

If you want your IT organization to be successful, you must be effective at managing your suppliers. Research conducted by the LeveragePartners indicates that a typical Fortune 500 company spends more than 60 per cent of its IT budget on external suppliers such as vendors and consultants.

An IT executive at an airline recently said 60 per cent was far too high. He estimated that no more than 35 per cent to 40 per cent of his budget went outside the company. He later realized that he hadn’t included the costs of his company’s airline reservation system, frequent flyer program and yield management system, all of which were joint ventures. His revised estimate: 80 per cent to 85 per cent of all IT spending goes to external suppliers.

Don’t find that alarming. Current trends indicate that even more IT dollars will be directed to external spending in the future:

    Outsourcing of IT infrastructure is increasing. Few IT departments have the capacity to develop and manage complex infrastructures, including server centers, networks and desktops. An outsourcer that specializes in providing infrastructure can usually offer better levels of service for less money.
    Off-the-shelf packages continue to replace custom applications. The quality of available packages has increased so dramatically that it’s rarely cost-effective to develop homegrown applications unless they truly provide a competitive advantage.
    CIOs look favorably on hiring vendors to handle thankless jobs. Infrastructure management, for example, is what I call a tie-lose job; few CEOs stop by to say, “Great job keeping the servers up.”
    Corporations realize that their competitive advantages stem from their core competencies, so business process outsourcing of non-core competencies is becoming more prevalent. Accounts payable, for example, rarely provides competitive advantage, so it’s often prudent to outsource all of it.

IT can also make its external spending more effective by addressing the following key supplier management issues:

    Create target cost reductions. Consolidate your supplier portfolio, standardize your buying processes and improve your contract negotiation tactics to reduce spending on significant portions of the budget.
    Align buying decisions with your IT architecture. Many buying decisions today are driven by individual project needs without considering implications to architecture. In the case of one of my clients, buying against the architecture would have prevented the unnecessary complexity and costs of having eight database management systems, six e-mail systems and 15 desktop hardware platforms.
    Develop an exit strategy for every critical supplier. When a contract comes up for renewal, have a plan for changing suppliers and minimizing the associated switching costs. Ruthless suppliers often hold a company without a Plan B hostage during contract renegotiations. In difficult economic times, it’s also prudent to have a contingency plan for disasters; if your supplier goes bankrupt, you must be able to recover as quickly and seamlessly as possible.
    Understand the total cost of outsourcing. If you outsource, you must continuously manage the supplier. That promotes understanding and allows small problems to be resolved before they grow. This takes time, money and a staff with the right skills, so don’t cut costs there. Invest in developing project and program management skills among your staff.
    Invest in win-win relationships with critical suppliers. Win-win is the only way to sustain a buyer-seller relationship. If you squeeze your suppliers so much that they can’t make a profit (or worse, go out of business) you have created a lose-lose situation. Being forced to replace a supplier unexpectedly can cause more headaches and expenses than dealing effectively with the one you have.

In a sluggish economy, it’s important for IT to show fiscal discipline and provide a good return on all its spending. Effective supplier management is one of the best ways to leverage your spending and boost the success of your IT organization.

Bart Perkins is managing partner at Leverage Partners Inc. in Louisville, Ky., which helps CIOs manage their IT suppliers. He’s the former CIO at Tricon Global Restaurants Inc. and at Dole Food Co. Contact him at BartPerkins@ LeveragePartners.com.