The trend of sourcing and outsourcing services has been the trajectory through the 90′s and onwards, with organisations delivering their IT through ecosystems of suppliers. As the nature of IT becomes ever more infrastructural and available as a ‘utility’ the shift to the sourcing of services will increase.
On this basis, one future vision of the IT leader is of an individual who strategically sources and manages an ecosystem of supplied services, however they are delivered. While some label this as a radical re-lensing of the IT leader role, I tend to see it as an evolution. It’s certainly true when seen through an SME lens, as coordinating external services is often critical in that environment.
The Services and Cloud Effect
People may question my focus on services rather than products? I’m a firm believer in a service dominant approach to IT, with products just being service delivery mechanisms. It’s a service that is invariably being purchased (and the metrics will often be service dominant also). You rarely just buy a physical product, invariably you are buying a service or the product is a component of a service and it’s that which is important. It’s not that IT should just be a service provider, it’s that IT should be service dominant.
Then we have the increasing importance of Cloud, which is driving the inexorable momentum to IT becoming infrastructural and a ‘utility’. I believe it’s dangerous to be too glib about Cloud. Too many still are, discounting the numerous technological evolutions and missing the potential revolution in the Cloud model. Cloud also represents a very service dominant approach, with a whole plethora of ‘products’ and ‘technologies’ being hidden behind a service dominant orientation.
Sourcing Principles
I’m a strong advocate of establishing principles for strategic endeavours. They provide an enduring element that is simple and stable across the process which can, like any project, involve risk, debate and an element of ‘controlled chaos’ and learning. They are a guiding light and a way to communicating across diverse stakeholders.
While individual organisations may have specific principles, the general principles below are used in this article:-
- Foster a principle directed, team orientated, collaborative approach
- Allow individual and organisational learning
- Focus on benefits to Stakeholders
- Utilise strategic, decision-making tools
- Adopt a enduring, relationship-based model
In all but the most simple of services, it’s important to recognise sourcing a service is a team-based, collaborative approach involving significant individual and organisational learning. This is good, as this is often where innovation occurs and interesting new ideas arise. While some individuals involved may be experts, the opportunity for suppliers to deliver new perspectives should not be forgotten. Not all stakeholders will be experts and opportunity to learn ‘the possible’ and ‘the necessary’ should be highly valued.
The service should deliver benefits to its stakeholders, those who will actually consume it. These benefits should be explicitly articulated, understood and measured (albeit the degree of measurement could be different). It’s quite possible the benefits may have already been established as part of a wider programme of work, but if not they need establishing with stakeholders. This can also involved significant individual and organisational learning.
The sourcing process is an an opening sequence in a relationship, long or short-term, that needs to be managed effectively. As we’ll get into later, it’s a bit like client relationship management in reverse, certainly the reciprocal component of the client relationship management the supplier is using. This is especially important in a service dominant model as the relationship is rarely a simple, atomic and very brief transaction.
Strategic Sourcing Chain
Looking back, the process I’ve used in the past has been similar to the below diagram. Depending on the nature of the service being sourced and the organisation the process may have varied slightly in terms of stages and depth, but its held together.
The strategic sourcing of services should be viewed similarly to sourcing new customers, it’s just some activities are reversed. You design the service you require, rather than the one you’re selling. You research the market to acquire the service, rather than the market to sell to. In a similar way, suppliers of services, like customers, are subject to relationship management, to different degrees, post-purchase. This is why, I believe, it’s best to involve people in the process who have been on both the supply / selling (idea external to your organisation) and demand / buying side of supplying services.
Projects and Teams
In line with the team-based, collaborative approach the process should involve a team of service stakeholders and the required functional experts. It is very likely to be a cross-departmental affair. Not all team members may be needed for every meeting and every part of the process, but the required levels of accountability needs to present where required. Depending on the organisation set roles may always be present like legal, enterprise architects, etc.
The process should be viewed as a project. A project lead should also be assigned who can coordinate the creation of the requisite level of planning and who can coordinate the team and push the process forward. Remember individual and organisational learning may be as much a part of the process as an aggressive, proscriptive plan.
Service Design
The first task is to design the service with the stakeholders. I’ve found the nature of the service design can be significantly different from one organisation to the next, often based on available internal expertise and wider initiatives. The commonality across the diversity is to focus on business outcomes rather than technical details. The following areas are representative of what should be addressed:-
- Vision and description of the service
- Clear business objectives and principles
- Identify the scope, stakeholders and risks of the service
- Identify clear benefits to stakeholders from the service
- Design of metrics for assessing the effectiveness of the service
- Current spend analysis of ‘areas’ the service is replacing
I believe, no matter what expertise is available at a technical level, the service is always designed through the lens of a service vision, business objectives and principles, benefits and potential metrics. In short, from a business outcomes viewpoint. Any technical requirements can fold in as constraints. This is because potential suppliers may come up with new and innovative ways of delivering services. If a wider Enterprise Architecture initiative indicates certain directions, principles and technical choices they should be folded into the design. In a similar vein, if the service is designed to deliver on a wider programme of IS-enabled change, the network of benefits it’s responsible for enabling or delivering will already be established.
Metrics are particularly important. It’s quite possible the exact nature of the metrics may change during the process and discussion with suppliers take place or via learning during market research, but having a firm foundation is key for the process of agreeing terms and conditions, service level agreements and the creation of supplier performance dashboards.
Market Research
The point of market research is to understand the existing market conditions along with the ability of suppliers to deliver the service. Essentially, it’s an individual and organisational learning exercise so that effective decisions and sound negotiation can be undertaken later.
The sources of market research I’ve used in the past are listed below:-
- Taking to suppliers
- Trade journals
- Annual reports from suppliers
- Snowball sampling through speaking to experts and then their contacts
- Trade associations and websites
- Investment analysis and reports
- Consulting organisations
The key is to not research beyond the point it has value and to ensure you have tools, techniques and models to present the data found in a way that is useful. This assessment and condensing process can take as long as the data collection. In some cases, the methods for presenting the research, such as Five Forces, may come already formed with the research material. There are various publication and databases that are very useful to have access to for conducting this research. I know I’ll miss them when I lose access to some of them via the Business School.
Strategy Development
Not all services being sourced are equal in terms of their strategic importance to the organisation. This is to be expected, as all investments you make aren’t equal, neither are all the services or products you sell. A service that is critical to profitability needs to be handled differently to one that’s routine and available from many sources. It is best to analyse and communicate the strategic nature of services to be sourced implicitly. This creates common understanding across the team, stakeholders and organisation.
The strategic sourcing portfolio, depicted above, is a good way to communicate the strategic difference between one service to be sourced and another. The placing of the service in a particular quadrant has implications for future actions.
Critical services should focus on partnerships with suppliers, increasing the role of those selected for partnership status to facilitate information sharing and potentially shared processes to leverage the value the supplier is bringing to the organisation. The services and relationship needs to go beyond a simple purchasing agreement. A critical service should be adding ‘additional brains’ to the organisation and the methods used in later stages should reflect that.
Bottlenecks are difficult because they’re not adding value, but they represent a risk to the organisation. This may be because there is few sources of supply, the impact on the business is significant if the service is disrupted or new technology is involved. Obviously, the goal here is to reduce the risk. This may involve working with a potential supplier to integrate them better, structure financial arrangements to help secure supply and in return work to ensure the supplier can deliver on the details of the service.
Routine services don’t add significant value, neither are they complex or risky and are readily available. On this basis of low risk and low added value the best strategy is to concentrate the spend, ensure competition is maintained and try and automate the process as much as possible. Certainly utilise competitive bidding for such a routine service.
Leverage services provide an opportunity, because they are low risk but add high value. They are important, like a critical service, but the low risks provides room to play more with maximising the commercial advantage to the organisation. Preferred suppliers can be used with an understanding long-term agreements are in play focused on incentives to reduce the cost of the service over time. High levels of service should be key with monitoring systems in place. Depending on how ‘aggressive’ on price you want to be, the low risk may allow a reverse auction, though the risk of a supplier pricing himself into not being able to deliver has to be considered.
Supplier Evaluation
There are many and varied ways to assess suppliers. The key areas of price, quality and delivery are important, but aren’t the only ones:-
- Management Capability: Continuous improvement, quality, experience and ability, workforce relations and long-term relationship potential.
- Finances: Financial condition, investment resources, cash flow, debt finance obligations
- Skills & Processes: Adoption of standards, best practice and recognised accreditations related to delivery of the service and supporting activities, workforce experience and assessment of actual processes
- Relationship Potential: Important for services in the critical quadrant (see strategy development), focusing on mutual goals, guiding metrics, conflict resolution
- Corporate Responsibility: The degree to which the supplier is a responsible business and the degree to which this will reflect on your business
A useful tool is a Supplier Selection Scorecard. The advantage of creating such a scorecard is it can carry over into managing the relationship by informing the supplier performance scorecard. The scorecard can be weighted to give different selection criteria more importance. The metrics on the scorecard will obviously be contextual to the service being supplied.
Negotiation
This is another big area, which I wouldn’t profess to be a singular expert on. It could certainly be an article in its own right. As an example, a range of tactics that can be used within the actual negotiation are not detailed here.
I believe the key to negotiation is developing enough understanding and having a plan. As a result, all the processes so far come into play: the knowledge of the market, the knowledge of the supplier compared to others, the strategic importance of the service being procured, etc. You need to understand exactly what you want, exactly what the supplier wants and reach a point they can accept.
The first question to ask: is negotiation required at all? It take time and effort. Negotiation is unlikely to be needed for Routine services as low risk and potential value suggest the competitive bidding process is enough. Services in the high risk and / or potential added value quadrants will demand a level of negotiation, especially Critical services.
So, how to approach it?
You should have clear objectives. It’s wise to categorise the objectives. Weigh up the work done in the service design and categorise the objectives based on the beneficial outcomes the service is meant to deliver. I’ve used a simplified version of the MoSCoW method on the past, concentrating on Must Have, Could Have and Won’t Have. At other times it’s been a simple green, amber and red to represent degrees of flexibility on negotiation. I lot can depend on context.
Consider it a bit like a sales process in reverse. It’s best to know the organisation and individuals you’re negotiating with. You’re market research also filters into this. The key supplier decision-makers should be identified and understood. These individuals can be researched on the web to build up a profile. This can provide a way to facilitate engagement, people make more favourable decisions towards people they like. Foster similarities and commonality with supplier representatives. You also need to understand the strengths and weaknesses of the supplier and the forces that influence it’s market which may alter their negotiation position. This understanding may allow concessions to be made that are of more value to the supplier than to yourself.
In terms of price, establish a range, with minimum, target and maximum. If the suppliers range has no overlap the negotiation is going to be more difficult, either because agreement won’t be reached or too many objectives have to be dropped. If your range and their range do overlap there is a point of you can both accept.
In my view, an excessively formal approach isn’t beneficial, and the home advantage is often useful. I believe it’s also best to be positive, and focus on the common ground, rather than differences and certainly don’t get irritated with the supplier.
Another element to consider is sitting tight on all information is not necessarily in your best interests. While certain information is key to your negotiation position, I’ve found it very useful to sell a narrative in these instances. The narrative of your organisation to make it one the supplier wants to engage with. You would do this if you were selling? I think it have value in reverse if you’re buying. Ensure the vision, culture and narrative of your organisation is understood by the supplier as it helps to get the supplier relationship management off to a good start, if applicable.
It’s important to remember the aim of negotiation isn’t to literally destroy the supplier on price. The outcome of the negotiation has to be, within reason, two winners. This is especially true with suppliers of services with with high risk and / or high added value. It’s possible to be more aggressive with routine clients, but less resources will be placed in face-to-face negotiation in these instances.
Relationship Management
Having worked in both supply and demand side of IT services I know two things are true. Not call clients are equal to the supplier. Not all suppliers are equal to the client. It’s a dual relationship which occurs on both sides at once and is often subject to multiple perceptions. A lot of relationship issues can come down to misalignment in this area.
There is going to be a relationship between yourself and the supplier. I believe it’s important to understand what you want that relationship to be in terms of its nature and length. The supplier will certainly be making decisions on what shape the relationship takes. It is quite possible not all suppliers will be intended for long-term, equity-based relationships.
This element should be being considered throughout the process so a picture can be be built as the learning progresses. The reason being it will factor into the terms and conditions, the service level agreement and potentially metrics used. Ultimately, it’s best to be aligned on this issue from the outset and over the life-time of the service.
Let’s take a step outside and look at it from the viewpoint of the supplier, using the portfolio approach in the above diagram. The drive to service excellence involves viewing all clients as a long-term relationship which has an equity value attached to it over time. I’m an advocate of this, if balance with commercial reality. The trouble is, if a supplier was to engage with all clients in this way he’d go bankrupt as the nature of the dual relationship suggests not all clients want to engage in that way (either by design or through internal organisational issues). As a result, clients are often split into four quadrants (certainly two) either explicitly or implicitly. The goal is to have the customer relationship management of your supplier and your supplier relationship management synchronised. You want to ensure the suppliers sees you in the quadrant you want to be seen in.
There is a risk in being a ‘Barnacle’, especially if that’s not the quadrant you see yourself in. You will either receive a highly cost controlled service, or be at risk of being a highly demanding client that is continually frustrated due to falling into the clients ‘too much effort for too little return’ category. Not a good place for either participant. The services sourced under an acknowledge ‘Barnacle’ relationship have to be very focused, understood, controlled and routine. This might be fine for a service classified as Routine, but being in this quadrant for services with high risk and / or added value would dangerous.
It’s not always wise to be in a ‘better’ quadrant than is necessary. If the service sourced is short-term and high value and this is the required mode of engagement it can be best to avoid the supplier putting significant time and effort into fostering long-term loyalty. You don’t want their eye taken off the current ball. Keeping the focus on a well delivered, high value transaction is the best way of ensuring another engagement, whatever the next position on the quadrant once the transaction is complete.
Personally, it’s unintentional drift across the portfolio which needs to be monitored. It’s a dual relationship so the supplier may be changing the relationship on you, intentionally or not. As an example, I forged a strategic partnership to manage and monitor a WAN across the UK, Europe and US. It was classified as being in Leverage quadrant, the goal being to drive costs down over a period of time.
It started very well in the first eighteen months. It then suffered from drift. The supplier was doing very well, hoovering up global clients to the extent an international SME became less critical and, despite their insistence it wasn’t the case, their actions indicated we’d drifted into the lower segment from their (relative) point of view. Action was required. Misalignment can be a multi-dimensional problem and, eventually, what matters is what’s actually happening, not intentions. This is why metrics measuring the right things are important, as the case for drift can be hard to make without the evidence.
…And Finally?
This article took a different shape as it matured and my experience merged with new understanding. It broke my 3000 word, absolute limit rule. Even then it short changes some sections. I still believe it serves as a useful overview that is hopefully useful.
The key item to take away is always to understand the context and make informed decisions: What is the understanding of the service required? What is the context of the market? The selected suppliers? The strategic nature of the service being procured? The shape of the supplier relationship? Understand this context and use tools to communicate it simply so that informed decisions can be made from that position of understanding.
As we, as IT Leaders, move further and further into the territory of delivering services and executing strategy through an ecosystem of supplied services, and models like Cloud grow, strategically sourcing and managing services will become ever more critical.
