Community Trip Report Sourcing & Vendor Relationships Gartner Symposium/ITxpo Orlando, Florida 8-13 October 2006 Key Takeaways This Trip Report

Transcription

1 Community Trip Report Sourcing & Vendor Relationships Gartner Symposium/ITxpo Orlando, Florida 8-13 October 2006 Key Takeaways This Trip Report highlights the major sessions from Symposium/ITxpo for attendees interested in sourcing and vendor relationships. It also encapsulates questions that conference attendees asked and forecasts some emerging issues to prepare for. The role of sourcing is not always a single individual s job. When it comes to complex strategic projects or initiatives like outsourcing, it involves a committee of stakeholders that make sourcing decisions and govern the implementation of sourcing actions as described within the stages of Gartner's sourcing and vendor relationships activity cycle (plan, implement, manage, govern). The role encompasses three fundamental disciplines: Sourcing is the approach an organization takes to plan for and implement sourcing actions, regardless of whether it is acquiring IT products or IT services. Procurement is the acquisition of services and products. Vendor management is a combination of the administrative management of vendors and strategic vendor management, which is about creating value with key vendor relationships. All three parts of the sourcing and vendor relationship role must align to the business strategy and business goals. If not, you will have a difficult time managing your relationships and you likely will not get all the value you desire from your vendors. Conference Highlights These Symposium sessions were particularly valuable for managing sourcing strategies and actions, procurement and vendor management: "IT Sourcing: The New Critical Competency" IT organizations must evolve from solely procuring IT to developing more strategic IT sourcing competencies, including sourcing governance, said Vice President and Distinguished Analyst Linda Cohen. Successful IT sourcing links

2 the sourcing strategy to the business strategy and the operations strategy. Follow four steps for successful sourcing: Plan: Identify your current sourcing challenges and elevate procurement and vendor management to a strategic level Implement: Understand differences in spending categories and create organization and processes to exploit the differences Manage: Create a vendor classification strategy and apply strategic vendor management to strategic vendors Govern: Know business demands for IT and measure sourcing effectiveness "Strategic Vendor Management" A strategic vendor manager is like the conductor of an orchestra, who can take in all the musical instruments to define what the process will be to play the music. Strategic vendor management will become more important as organizations spend more of their IT budget on external sources and as clients look to create more value from key vendors. Vendors are spending a lot to manage their clients, and the clients should too, said Vice President Chris Ambrose. It's important to start early, so that strategic vendor management can help define the relationship, analyze the supply market or support the selection process. "Vendor management is not an afterthought it's not something we decide to do once we've brought those vendors on board," Mr. Ambrose said. Best practices for strategic vendor management include: Start slowly, not with a big bureaucracy. Build a strategic relationship with one vendor and build processes and knowledge to add more vendors to the program. Hire strategic vendor managers with strong relationship building skill. Often these will come from individuals that have worked in client management roles for vendors. Organizations need to pick vendor managers who can operate on the same high level and who can build vertical relationships in your organization and facilitate horizontal relationships with vendors. "Sourcing Strategy: From Decision to Action" Organizations need good sourcing strategies to better control IT spending and to align sourcing with business goals, said Vice President Helen Huntley. Organizations that do not have sourcing strategies will continue to source

3 compulsively. This leads to ad hoc, compulsive outsourcing and these sourcing decisions usually disappoint in the long run. Begin to draft a sourcing strategy by asking the question: "Why are we sourcing?" Examples include: the need for agility to meet business demands; improvement of operations; a boost in business performance or market competitiveness. Then, answer, in this order: What services should we consider outsourcing? Who (internal or external sources) can best deliver these services to meet our goals? How (customized or shared) should the service be delivered? From where (onshore, offshore, nearshore) should the service be performed? "Software Is Everywhere: How to Negotiate the License Agreement" Many enterprises do not negotiate effective, long-term software license agreements. Their biggest mistake usually is buying software they don t really need, because the vendors offered steep discounts, said Research Director Jane Disbrow. "I have wonderful things I got at a great discount hanging in my closet that I've never worn. I think software can be a lot like that," she said. Some common software license pitfalls include: The contract does not clearly state who can use the software and how users will count in an audit. The contract does not say what will happen if the enterprise or the vendor goes through a merger, divestiture or acquisition. The enterprise does not negotiate maintenance, service-level agreements or support entitlements. Enterprises that negotiate these items upfront usually can get more software license rights at no extra cost. If they try to make changes later on, the vendors will charge for it. "Best Practices in IT Procurement" Organizations can get the most out of the goods and services they buy if they use a professional IT procurement team, said Vice President Bill Snyder. Some best practices for IT procurement include:

4 Use a governance process to define the rights and responsibilities of all stakeholders. Continuously manage the relationships with each stakeholder community, including service requirements and tasks. Conduct a spending analysis and review contracts for renewals, terminations and pricing details. Review purchases regularly to ensure they deliver business value. Analyze the markets continuously to take advantage of changes. "The New IT Investments Powering Productivity and Growth" Managing Vice President and Gartner Fellow Daryl Plummer got the attention of Symposium/ITxpo attendees when he declared that "Eight out of 10 dollars you spend on IT is dead money"; that is, money that does not directly contribute to business growth or enhance competitive advantage. Mr. Plummer urged IT organizations to focus more on issues that matter to the business, not that just matter to IT. Executives in charge of sourcing and vendor relationships can counter this trend by creating sourcing strategies that place business needs first, said Ms. Huntley. "Without a strategy, decisions will continue to be made ad hoc, tactically and removed from business needs and goals," she said. What People Asked About How do we effectively measure all the vendors we deal with? Many organizations do not have the right incentives in place (positive or negative) to drive provider behavior to meet the organization's goals and objectives. They measure a lot but don t use the results to drive behavior or achieve continuous improvements. Contracts and relationships, therefore, lack some teeth. To have a better chance of success: Measure consistently across the organization (because many times, business units act autonomously) Use a standard way to define value. measure performance to value, and drive vendor behaviors How do you distinguish between procurement and vendor management? Procurement tends to be driven by markets and order execution, not by relationships. Procurement is often "I need a product, so I buy it." It tends to be

5 event-driven, price-driven and tactical. Vendor management looks at the whole relationship. The focus is ongoing, value-driven, strategic and often intangible. What can I do to get a vendor interested in doing business with my organization? The external value to the vendor in essence, the vendor "perks package" is an important element to a sourcing deal. Vendors look for perks such as: Constructive feedback Opportunity for more business in the future Testimonials Replicating success to other customers Gaining an executive audience Insight into clients' strategic plans How do you sell centralized sourcing to IT business partners when cost savings and synergies don't come? If you can make the argument about governance, you will gain an enduring way to set up a centralized operation. It's not just about controlling cost. It's about demand management. The core value is understanding business needs and using technology to rapidly and flexibly supply those needs. You can't do that if you're not connected to the business source. You need to be in control of demand and you need to get a strong sourcing governance model in place that at least must be centralized. Things to Watch For Sourcing offices will remain rare, so use the people you have. Not all organizations will have the luxury to set up sourcing offices to run all sourcing activities. Typically, sourcing managers will need to control activities by creating a virtual community of people involved in sourcing activities. Organizations can: Use a sourcing council of executives to govern and decide the rules Use committees to turn policies into action and get things done Set up communities of interest to create, socialize and improve actions Sourcing offices can lower total cost of ownership, standardize processes and unify the message to the vendors, said one Symposium attendee who set up a sourcing office. It's not easy, though. "It takes a lot of time working with senior

6 leaders and managers to say, 'We can help work with you to do research, set up negotiations, find the right vendors at the right time,'" he said. Large companies can create their own competition for services. Large companies are experimenting with selecting two or more providers to compete for work. For example, some companies use two application development providers. Each time the company needs application work, it seeks a bid from each provider. Providers that win the development work have a better chance of also getting maintenance contracts for the applications. Companies that try this model may fall behind pricing trends. To succeed with this model, benchmark every 18 months to get current prices. In addition, structure contracts so that if neither provider can offer a price in the top quartile, your company may seek bids from other vendors.