How To Build an Effective IT Sourcing Strategy: 5 Crucial Insights
Organizations must strike a balance between efficient IT operations and adaptability to ever-evolving technological advancements.
Cost optimization needs to be a continuous activity that is collaborative, agile, transparent and integrated. Most traditional cost controls lack these characteristics because they were designed for a relatively static environment in which the recent past could reliably predict future needs. This is no longer the case. Today, many traditional methods including traditional strategic sourcing approaches have been rendered obsolete.
Should you replace traditional strategic sourcing design with a cost optimization center of excellence (CoE)? A cost optimization CoE is an effective way to drive breakthrough cost improvements in today’s highly dynamic business environment.
The fact is traditional strategic sourcing was designed to address a set of business conditions that do not exist today. At the time that strategic sourcing came into prominence, year-over-year spend was generally consistent. But, because expenses were often entered manually and inconsistently, understanding year-over-year spend required significant analytical effort. This meant that spending decisions were made with limited visibility. To compensate, companies worked to improve visibility, aggregation and competition and depended on aggressive negotiation.
Traditional sourcing is a linear process, starting with data collection and analysis, followed by a structured and managed competitive process with a negotiated agreement at the end. In traditional approaches, optimization assumes both centralization and standardization of sourcing decisions, rationalized to minimum viable requirements.
Multi-year deals are structured based on competitive pricing leverage and risk allocation and a great deal of attention on enforcement through compliance. The rigidity of deals makes them costly and complicated to change or terminate. Eventually, automation and AI were introduced into sourcing, but for most companies, even so, sourcing remains a largely linear process based on the original design principles.
The rapid change in business strategy and capabilities resulting from technology innovation has changed that. The goal now is to sense and respond intelligently to an ever-changing set of needs, trends and behaviors. In many cases, enforcing large, centralized agreements negotiated in the past impedes the agility required to optimize rapidly changing costs and risks.
In other words, traditional strategic sourcing techniques can burden the organization with commitments that reflect obsolete business requirements and, therefore, hamstring the organization’s ability to optimize costs in a rapidly evolving business environment.
A cost optimization CoE drives well-informed decisions made closer to the information sources. Decisions made more quickly and consistently are more effective at prioritizing resource allocations, driving efficient and effective behaviors, optimizing processes and technology and eliminating waste. The mission is to do more of the things that drive business results, faster, for the same or less money. A well-designed CoE will institutionalize a framework that can influence both the cause and effect of cost-driving activities as close to real time as possible. The intent is to identify and execute the actions that drive the most desirable behaviors and results.
The CoE should be able to shape and rationalize demand, not by imposing draconian restraints but rather by providing real-time transparency into cost drivers, options and consequences. A good CoE will work to expose potentially avoidable costs before it is too late. Unlike a crash diet, a CoE establishes healthy behaviors suited to the patient as a part of standard operating procedure. Good health is driven by effective collaboration, good data and business-aligned objectives.
The benefits of a cost optimization CoE can be significant, usually including at least 10% savings on an organization’s budget.
Figure 1: Example of a Cost Optimization CoE
ISG helps organizations build the necessary framework to launch a cost optimization CoE and transform their relationship to their spend. Contact us to get started.
in advised sourcing deals
We can take you from idea to signed contract in under sixteen weeks. Our unparalleled contractual data - including over 180,000 contracts - sets the standard for sourcing contracts worldwide, thus reducing redlining and preempting lengthy negotiations.
Our deep expertise allows us to advise on contracting with top tier and niche providers alike, drive collaborative solution building, and design and execute aggressive business cases. If you have unique requirements, we can rapidly create a custom methodology
to achieve your goals. For renegotiations, ISG is positioned with market-based contract data, strategies and recommendations to surpass your strategic and financial objectives.
Develop a strategy & target operating model for your technology landscape, including what to source, renegotiate or retain.
Build the business case for sourcing, starting with a benchmark of your costs against the market and TCO models.
Find the right providers for your needs based on our deep market research & experience, and our unmatched contract data.
Our proven-comprehensive sourcing and contracting solution: flexible, fast, collaborative and built for you.
Transition & Transformation
Address the challenges of a transition; build a strong foundation for partnership and transformation to the future state.
The results? A contract that allows you to manage your technology services to realize the power of your business case.