If IT Is from Mars, Procurement Is from Venus: 5 Steps to Break the Chasm between IT and Procurement for IT Sourcing
It may seem at times that the IT and procurement departments can be on different planets when it comes to IT sourcing services spend. But it doesn’t have to be “us” versus “them.” Read on to learn how to counteract differences in communication styles and behavior patterns, so your entire organization wins.
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How their stars align
Anyone who has set up a new procurement department at a firm with large volumes of untracked indirect spend knows they first need to target the IT department and get involved in their sourcing projects. The reasons are simple – IT has large volumes of spend, generally adopts procurement practices the earliest, and can become the greatest support system in the long-term. The CIO’s office consists of the visionaries who are willing to take high risks of trying something new and are the least process-sensitive of all business units. Often, IT category managers end up closely collaborating with their functional leads, and certain organizations centralize procurement departments in IT. Further, as early adopters, IT prefers to rely on their own intuition and vision and also are willing to serve as highly visible references to other adopter groups in the population (i.e., other business units). Thus, IT is the stepping stone for procurement if they want to establish their foothold in the organization and increase spend under their influence, which is still abysmally low. The typical procurement team is not involved in nearly half of their company’s services spend, as can be seen in the exhibit below.
Procurement influence across indirect spend in Pinnacle Enterprises™ (best-in-class organizations that lead the services sourcing journey) and other enterprises
Source: Services Sourcing Organizational Maturity | Pinnacle Model® Analysis (Everest Group 2020)
However, at the same time, the IT function can be highly demanding. IT is always in upheaval, beset on one side by users and the other by budgets. As in any relationship, IT and procurement tackle multiple such chasms, but their problems range across the same old partnership concerns that exist in modern-day relationships – stonewalling, unsolicited criticism, and the atypical “you never listen to me!” argument. Multiple examples can help prove this analogy: IT and procurement do not have regular meetings (in most organizations, they do not even meet monthly), do not involve each other across stages in sourcing engagements (IT is known to invite procurement late in the sourcing journey, whereas procurement is known to keep IT out of negotiations), and still treat each other as separate entities, instead of working towards a shared goal.
If the two could solve a couple of key issues in this troubled relationship, the IT-procurement partnership can create great profitability for the firm in the long haul. Here are five ways to help strengthen the bonds between these crucial areas:
- Support each other’s growth and development: The basic rule of a relationship is that when one is growing at a rapid pace, the other needs to ramp up to provide support. Organizations are being driven to rapidly undertake digital transformation by recent market trends such as migration to cloud services, servitization, and cybersecurity measures becoming the new norm. IT spend is spearheading the growth of an organization, with IT spending worldwide expected to reach about US$4.2 trillion in 2021, an 8.6% increase in growth compared to 2020. Specifically, the IT services market (that encompasses a range of offerings that assist enterprises in implementing, managing, and operating a wide variety of systems, software, and equipment that are used in modern IT environments) accounted for over US$152 billion spend in 2020 and is one of the fastest-growing segments in the overarching IT industry, trailing only enterprise software in terms of year-over-year growth. This increase in IT services spend requires procurement to rewire their own agendas from being cost-focused towards becoming more value-focused, and also reshaping outsourcing contracts to ensure long-term success in today’s changed outsourcing environment
Growth in IT spend from 2016-2022, including hardware, software, and services spend (2021 and 2022 spend values are estimates)
Source: Statista (2021)
At this point of rapid growth, it is imperative for procurement to up its IT sourcing game by becoming more agile and reducing sourcing turnaround time, gaining more category intelligence in emerging technology areas such as blockchain and cybersecurity, getting used to negotiating complex licensing agreements, and adjusting contracts to incorporate recent rate increases requested by suppliers due to the current scramble for IT talent.
- Stay involved throughout the journey: At the onset of any relationship lies trust, and both parties must build trust and loop each other in all aspects related to the sourcing journey. IT can implement this by undertaking steps such as including procurement at the requirements gathering phase in a sourcing engagement, keeping them abreast about business requirements that can drive supplier capabilities, giving a transparent picture about supplier performance in oral presentations, and ensuring procurement is involved in all conversations about sourcing selection. This deal goes both ways. It is essential for procurement to keep IT onboard for actual negotiation talks and decisions, help price and right-size contracts for deals, and bring category and sourcing intelligence from past successful deals and supplier partnerships
- Back each other in times of crisis: While risk management has become key in today’s day and age, occasionally, there are crises that no one can predict. Smart strategies help in such scenarios, for instance, during the coronavirus crisis, many IT and procurement leaders worked together to keep their small- and medium-sized suppliers afloat with early payments and by identifying new areas of cost optimization (e.g., creating negotiation opportunities through internal demand management without harming suppliers)
- Listen to each other: Regular communication is key as each party brings in specific skillsets and typically, IT and procurement should have a monthly cadence at the minimum. The results of proper communication can be seen through an example in sourcing risk mitigation – IT brings a better understanding of the contractual risks, such as the possibility of software license audits, while procurement has the experience within contract risk management to ensure suppliers establish appropriate controls and provide contingency plans. In this scenario, IT and procurement can leverage each other’s skillsets to ensure end-to-end risk coverage
- Finally, act as partners, and not as boss-subordinates: Traditionally, procurement treats category departments as their end customer and becomes driven towards serving all their needs. However, it is crucial to treat this relationship as a partnership over a boss-subordinate model (where IT is the client and procurement is the department serving them). Procurement should confidently bring in their expertise from strategic sourcing and spend analysis to contracting, benchmarking, and spend management to deliver value within IT. Procurement also should provide constructive criticism towards IT decisions, even if it involves redesigning their buying process
This point is key – but it involves a fundamental shift in the way these two departments view themselves. In my last role in procurement consulting driving value in the IT category at a US-based consumer packaged goods firm, I observed that while procurement worked closely with the IT team (with the procurement team even sitting within the IT office), they were often at loggerheads. Being the subordinate department in this case, procurement frequently had to go the extra mile to ensure the IT department did not make destructive moves, such as revealing the baseline to the supplier at an early stage, or unconsciously leaking to selected suppliers that they would definitely be awarded the contract (and thereby sabotaging procurement’s negotiation strategy in the engagement). Being on the procurement side, I did not understand how IT was suffering due to procurement’s clear invasion into their territory. I can imagine that the IT audience reading this blog can talk in detail about procurement’s insufferable demeanor and uninvited settlement on their home ground. By better understanding their differences, IT and procurement can find common ground and realize they can effectively operate in the same universe after all.
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For further details on how we can support sourcing and vendor management leaders, contact Bhanushee Malhotra, Practice Director, at [email protected]