Organizations will spend $3.7 trillion on IT in 2018, marking a 6.2% increase over last year’s spend. Moreover, IT buyers spend more than they need to on purchases and renewals in more than 75% of the time.
Kim Addington, chief operating officer at NPI, provided these statistics as context during a webinar she co-hosted last Thursday with Pierre Mitchell, chief research officer at Spend Matters. The webinar provided a look at today’s IT sourcing landscape, key challenges and how cutting-edge IT sourcing organizations are handling these challenges.
The IT Sourcing Landscape in 2018
Digitalization of IT and externalization of sourcing and supplier relationship management are the two major forces affecting IT sourcing today. The concept of externalization includes outsourcing, third-party management, strategic sourcing and category management.
While many companies might have a chief digital officer, Mitchell remarked, few have dedicated resources for externalization. The key questions here are how to bring digitalization and externalization together and how IT and procurement can better align and collaborate.
IT sourcing has evolved over the years. As Addington noted, IT procurement has historically focused on standardizing the purchasing process and finding cost savings. While those objectives are certainly still relevant, revenue generation has also become a key goal.
As a result, it’s not about cutting spend but rather spending more wisely. “Organizations are moving from a cost savings model to a business case model,” Addington said. “This way, sourcing becomes more aligned with the expected outcome of each investment.”
What does spending wisely look like? Addington explained that this includes funding more initiatives and pruning autopilot spend; cutting the lifetime cost per initiative; and holding vendors accountable over time and making sure that milestones are being met.
There are a number of other factors and trends that are causing IT sourcing to evolve. Digital transformation is raising expectations and risks. Cloud migration is driving new purchases and vendor behavior. The subscription economy is amplifying challenges of keeping track of renewals and spend, including uncoordinated IT spend. And software license audits are becoming increasingly common and complex. All of these trends are contributing to the new reality of IT sourcing.
The fact is that the market is stacked against IT buyers. Pricing disparity is rampant, with differences of 10%–90% in pricing for similar purchases, making it extremely challenging for buyers to know if they are getting a good deal. Licensing models and terms are constantly changing, making it hard for buyers to keep up. Vendors also have the advantages of highly trained sales teams and the fact that the buyer side tends to not be adequately aligned for the negotiation, rushing to get the purchase done once they have made a choice.
Tackling IT Sourcing Challenges
First off, here are the three questions that buyers should be asking themselves:
Am I paying too much for this purchase?
Am I buying more than I need?
If the answers to the above two questions are yes, what should I be paying and buying, why, and how do I negotiate with the vendor?
Asking these key questions is part of having what Addington and Mitchell called a “buy-side playbook” — tips and strategies for getting better business outcomes from vendors.
Particularly important is adopting an end-to-end integrated lifecycle framework. “The single most powerful best practice within procurement to drive value is early involvement with the business at the time of business planning and budgeting,” Mitchell said. “We found that 15% of the money that goes to suppliers is wasted just because of ‘use it or lose it’ budgeting policies.”
There is also the issue of shadow spend. “There’s a lot of money that creeps into your contracts and then creeps out the door,” Mitchell remarked. “IT and procurement lead amazingly parallel lives — shadow procurement and shadow IT.”
He continued: “It’s not good enough to just be able to aggregate your spending and look at that by supplier and say, ‘That’s IBM; that’s a technology supplier.’ You’re going to find cloud spending buried in a lot of managed service provider contracts and business outsourcing contracts.”
It is therefore important to get to the line-item details of where your organization’s money is going. This involves looking at your system management tools, licenses and contracts, and then understanding where you have risk in terms of IT ownership, data ownership, cancellation and shadow spend.