A recent article on IT Outsourcing Category Management over on Efficient Purchasing did a great job of capturing the nuances of the category in that the drivers will be dependent on whether it’s a first or subsequent sourcing event and so will Procurement’s role. In the outsourcing scenario, the number one driver is access to competence. Cost reduction and flexibility take a back-seat with Procurement, whose role is to facilitate the process, that is led by IT, and ensure a competitive environment. In a subsequent event, cost reduction becomes the number one driver and innovation, completely absent in the first phase, jumps into the back-seat. Procurement jumps into the driver’s seat, leading the effort to find qualified suppliers that can reduce costs and increase value.
However, the two events are not completely different. In both scenarios, Procurement must master stakeholder management, do its homework properly, understand risks and the nature of likely disruptions, accurately model cost, and get a grip on the value a supplier could bring to the table. The last part is key, since while 67% of IT leaders rely on outsourcers to turn ideas into new and improved processes, as per a Warwick Business School study, only 33% measure the impact of innovation delivered by service providers, which is key component of delivered value. Plus, as per an IDG Outsourcing Survey, IT Outsourcing has only led to cost reduction and flexible staffing in one third of engagements!
And contracts are a major headache for the unprepared. In addition to detailed descriptions of the services, service levels, and service management process, that need to be provided, a significant number of commercial terms and legal terms generally need to be provided as well. Plus, contract templates should be included in the bidding event as this will let potential providers know what is expected of them. As a result, many projects have to be planned six to twelve months in advance as it often takes four to eight months just to stipulate the scope of services and SLAs, which needs to not only define the services, but the transition plan and an exit plan should the contract not be renewed.
In yesterday’s post, we discussed some of the suggestions from Henry Nothhaft’s recent book, Great Again, on How to Revitalize our Innovation Engine. These suggestions included the liberation of entrepreneurs and start-ups from start-up killing taxes and regulations, the restoration of the VC engine to an earlier design where it worked well, and ending the indifference to domestic manufacturing. These are all great suggestions, but probably the most important suggestion Henry makes is to:
- Fix the Busted Patent System
It’s an IP economy and (legitimate) patents are critical for a successful innovation economy, especially since investors (and VCs) want to see IP and protection for that IP before (continued) investing. However, the patent office has a backlog of 1.2B that is growing daily, primarily because, what should be one of the few self-funding agencies is being treated as a petty-cash drawer by the politicians, who have cut 150M in funding this year alone. The patent office needs to be fully funded, needs field offices where patents are filed, needs to modernize, and needs to be able to price with the market (including fast-tracking pricing options).
About the only thing I’d add to Henry’s suggestion list is to:
- Abolish sotware and business process patents
The EU has it right. Software should not be patentable and business processes have existed since the day after the invention of money. All these types of patents do is clog up the patent system, enable the patent pirates, and stifle innovation as funds that should be spent on innovation get spent on overpriced lawyers instead.
So what does this mean to your Supply Management operation?
It means that if you want to enable long-term success, you should:
- help your company establish an innovation fund
to fund innovative new start-ups that are working on technologies that could revolutionize your manufacturing or supply chain
- source (some product) domestically
as not only will this help insure supply if the overseas option(s) suddenly become(s) unavailable (due to political unrest, a shipping disruption, etc.), but it will give you ready access to another source of innovation that will complement your own and support the local economy (which needs to be strong to increase local sales)
- NOT buy from companies that support patent piracy
if a company is flooding the patent office with software and process patents, don’t buy from them. Period. They’re the reason we have patent pirates, and if they all go out of business, or change their ways to stay in business, things might get better.