The importance of sourcing in digital transformation

Approximately a year ago, I had the opportunity to work with a global IT organization on their transformation journey. The starting point was a corporate demerger and the need to re-structure IT to achieve operational efficiency and value creation – to boost business competitiveness. It was in essence a mindset journey where the IT managers needed to view themselves, the IT organization and their IT function from a business perspective.

The key challenge for the company was the sourcing department and their view of being besides the transformation program. Their purpose, formulated by the IT managers, was to manage vendor contract and ensure the best prices for IT services. Why change?

The situation is not unlike other IT organizations where IT sourcing has primarily a contractual and controlling purpose. Many IT sourcing departments are even measured on saving according to vendors list prices. The role of the IT sourcing not difficult to understand as it is difficult to concretely evaluate the value of the sourcing department. How does IT sourcing contribute to business performance? In fact, before 2015, there was no formal research displaying the connection between vendor relations and business performance – leading to the assumption that the only purpose of sourcing was to keep cost and risk down.

However, in 2015, researcher John Henke (School of Business Administration at Oakland University, Rochester) was able to show the relationship between strong vendor relationship and increased revenues. He concluded that non-priced benefits (such as networking, innovation and attitude) are far greater than any benefits from contractually pushing price downwards. In fact, the non-priced benefits have 3-4 times the effect on corporate profits than the other approach. For every EURO earned in decreased cost, 3-4 EUROs are lost in potential business revenue. The idea is that vendors with the ability to breathe and make a profit are more eager to support their clients to be successful. The role of the sourcing department plays a pivotal role in the company’s digital transformation!

The consequence of a traditional sourcing function in a digital business landscape are crucial. Recent research (Rimini Street European IT Innovation Study 2018) shows that less than half of their respondents’ state that current contracts with service providers do not accommodate innovation. The problem is not the vendors willingness to support innovation but rather sourcing departments mindset and purpose.

My point of view is that buyers of IT services (sourcing departments) need to view themselves from a business perspective and how they contribute to customer value creation. This means that sourcing department need to be governed and measured on how vendors contribute to the overall business performance on long-term rather than short-term price levels. Also, to learn how vendors can support business challenges with their network of experts/customers and though leadership. In the end, it is about having a good dialogue based on mutual respect and trust. Unfortunately, few sourcing department contribute to business benefits, but those who do experience fantastic benefits. A IT leader I recently talked to stated that the border between employees and consultants was being erased and that she wanted the stars (with right attitude and focus on value – regardless of origin) to turn the IT organization around. That is the future of IT.

My recommendations:

• Re-define how IT sourcing and vendors create value for the IT and business organization. Value is relating to how they contribute to the business objective and strategy.
• Dare to set up meetings with your vendors to discuss business challenges! If you open up and share your problems – they will contribute to a solution. Build the relationship through trust!
• Share information and knowledge in your ecosystem to boost combined competitiveness.
• Vendors: dare to go outside the contract and share experience and expertise with your customer.

Today, very few companies have all the required competence and capabilities needed to compete in the digital market – and are dependent on external support and advise. Therefore, the ecosystem, based on mutual respect and trust, plays a pivotal role in creating business competitiveness. But change does not have to be difficult and painful. It can be about inviting your vendor to a coffee and discussing how to improve your relationship. Every journey starts with a first step!