Strategic Sourcing and Procurement for Technology Cost Optimisation

Following our first article in the series ‘Analyse and rationalise: Understanding how to assess and optimise IT costs in a downturn market’, this article focuses on the importance of taking a strategic approach to technology procurement and sourcing.

In the current economic climate, optimising strategic technology sourcing and procurement is becoming an increasingly critical factor for reducing the cost base and delivering value to the whole enterprise. 

However, in our experience, many organisations take a short-term view to sourcing and procurement, focused on resolving immediate challenges rather than delivering a longer-term advantage. Strategic sourcing has evolved beyond the traditional role of procuring services at the cheapest rate – it is now an opportunity to supplement key organisational capabilities to enhance innovation, deliver agility and build competitive advantage. Balancing how, where and when third-party services are used can be challenging and requires careful consideration.  

Sourcing and procuring a technology partner are fundamental to delivering business value effectively and efficiently. These are relationships that need to extend beyond the realm of procurement specialists and technologists. At the very least, senior leaders – such as CEOs and CFOs – must have an appreciation of their strategic technology partnerships and how they can leverage them to secure the best commercial outcomes. The Key elements to consider are:  

• Sourcing strategy is aligned to business objectives – This is a critical aspect of strategic sourcing: technology investment and spend should support the strategic objectives of the organisation, ultimately ensuring that procurement contributes effectively to the overall success of the business. In practice, this means the business's short-term and long-term objectives are clearly understood, KPIs are identified, and stakeholders are fully engaged and bought into the process. 
   
• The shift in focus from cost to value – Cheapest is rarely the best option. The upfront costs of a technology acquisition need to be balanced with the total cost of ownership (TCO) and the expected benefits and returns on investment. A strategic procurement approach, plan, and framework should be developed upfront to deliver maximum value for the business.
   
• Strategic partnerships are developed and leveraged to maximise benefits to the business – Developing a long-term strategic partnership can serve as a ‘force multiplier’. Long-term, synergic relationships can also foster an environment for collaboration, allowing access to cutting-edge innovations and technologies. Importantly, working closely with trusted vendors can result in enhanced service quality as well as cost savings through more favourable terms and preferential pricing.
   

Recently we helped a telco client with the strategic sourcing of their legacy application estate. The client not only had c.100 suppliers providing services, which made managing the services and outcomes complicated, but also there was significant value leakage. We helped the client build the outsourcing blueprint and managed the end-to-end lifecycle of strategic sourcing from baselining to requirements gathering, contract negotiations and transition planning. 

Our work enabled the client to reduce the number of suppliers to just one and secured a commitment to reduce the legacy estate by 70%. The new contract will help the client realise £65m annual savings within two years of contract signature, increasing to £145m over the following two years.  
 

To ensure optimum value is generated from your technology partners, we recommend the following best practices:

1. Have a good understanding of your existing technology spend – As set out in our first article, it’s not unusual for total technology costs to be poorly understood, disparate and uncontrolled. Shadow technology procured locally in the business units results in inefficient spend and duplicative functions and capabilities. 
    
2. Understand the supplier market – With clarity of business needs and current technology spend, it is valuable to have a good understanding of the supplier markets: current conditions, trends, location, risks, challenges. and any other factors that may influence them on decision-making.
    
3. Have clarity over key sourcing decisions – Using the overall Digital strategy to drive key strategic sourcing decisions like the approach to providing a robust compliance framework for IT, e.g., outsourcing the Security Operations Centre (SOC) to gain best-in-class frameworks, processes, and tooling.
    
4. Have a clear sourcing and procurement strategy, objectives, and policies and communicate it across your business – Communicating with everyone across the business especially those involved with the procurement process supports engagement and encourages feedback to make improvements. Communication should not only share what the strategy is but how it will be delivered and, importantly, what benefits it aims to bring to the business. 
    
5. Make sure all aspects of the sourcing and procurement lifecycle are properly managed –While sourcing and purchasing are key to strategic procurement, having a comprehensive understanding and robust management of the overall lifecycle can drive significant cost savings. It ensures the longevity and optimal functionality of tech assets and services, which in turn eliminates or defers costs associated with replacement or major repairs. It can significantly impact the ROI of technology investments. 
    
6. Learn and improve – Continually track progress and request feedback from all stakeholders involved in sourcing and procurement. Make adjustments when and where possible to continuously improve results. While it is important to stay focused on the overall procurement strategy and objectives, it is also important to be agile and adaptable to respond to changes which impact it. 
    
7. Sustainability and ESG – Consider the ethical and sustainability aspects of technology sourcing, including environmental impact, labour practices, and ethical considerations associated with technology development and deployment. Our colleagues have recently published an article on Sustainability – The fourth dimension in Strategic Sourcing: How Sustainability can drive value – where they discuss how to incorporate sustainability into a strategic sourcing process. 

In summary, putting in place a strategic approach to technology sourcing and procurement is essential. Businesses must continually adapt and refine their approaches to establish strategic vendor relationships to manage their tech assets and services effectively.

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