Transforming procurement in a strong IT environment: Hardware, Software, Services and Telecomunications case studies

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"How does the procurement function get its hands on the company's IT spend?" is a key question in many large organisations. It turns out that getting the mandate is only the start of the game. Getting a strong IT function to support and implement the proposed procurement strategies is a different kettle of fish. Here follows  Ian Russel, Chief Procurement Officer, ABSA Group Sourcing, (a member of the BARCLAYS Group) thoughts on how he obtained a mandate for procurement intervention in IT spend and strategies that worked in their environment.

Ian told delegates at the SmartSourcing 2007 conference that "When Barclays acquired 56% of ABSA  in July 2007,  implementation target synergies confirmed to the markets were R1.4bn by 2009, and cost reduction target of R560m. (The company's cost base at the time was R15bn)"

"In September 2007 Exco reaches agreement on funding to create a completely new sourcing organisation, with a complete mandate over all third party spend, including technology. Absa Group Sourcing officially launches in January 2006"

At the time some of the key issues for technology sourcing were:

  • "UDI" being declared across Group IT, with commitments being made to suppliers directly and, little governance
  • No detailed management information to show how the money was being spent
  • No real systems - the only ordering 'systems' handled less than 15% of total spend
  • No capability in depth - 3 people buying technology, with little formal training
  • No robust policies of processes
  • No evidence of compliance tracking
  • No credibility/presence in the supply market for the buying team - Group IT were the decision makers
  • No sourcing strategies or targets
  • No benefits realization culture of processes
IT Stakeholders had various issues with Procurement's intended "assistance" with the sourcing process which included. Ian listed some of the key issues and people's thoughts at the time:

  • Creating credibility with Group IT...

    "You've no previous history (in sourcing IT) , why should I trust a centralized Sourcing function - after all, buying is easy and quite fun to do myself..."

  • Establishing decisioning rights & mandates...

    "But it's my money, and I want to spend it out of my budgets any way I want to - who are Sourcing to tell me how to spend it?
    "You guys don't understand IT... Sourcing don't even understand the difference between a MIP and a CHIP!!!"

  • Building a Procure to Pay capability and platform...

    "this is boring and slows me down - just asking the supplier to deliver and signing the invoice is easier....

  • Creating a credible benefits tracking capability...

    "...can't be bothered. Don't you know I have a running  environment to manage!"


    Overcoming objections: Promising a 5:1 benefit ratio

"To overcome these objections we established simple business friendly straplines to help the business understand why Sourcing made sense. For example, we promised a 5:1 ratio - Sourcing will always deliver 5 times our cost in benefits. Every year. Out of budgets. That's the deal."

We showed Group IT we understood their spending habits better than they did, by using SBU specific cuts of data: for example, 'cost centre x spent y on software last year. "Did you know that BEE levels of spend in your area are the worst in the Group?"

We created business led governance, with a monthly Category Advisory Board (CAB) chaired by the Group CIO. All sourcing strategy, deals and benefits claims are now reviewed and signed off at the CAB

'Do as you say, say as you do, and deliver!' Deliver high profile, tangible, emotionally resonant deals first to get the stakeholders on our side. Then deliver some more.

What follows are some of the deals done by ABSA Group Sourcing:

CASE STUDY 1: Managed Desktop Services

Background & context:
  • Desktop estate of 35.000 PCs, was managed through a single contract
  • Contract 6 years old and due to expire and, ABSA owned significant equity in a JV with the service provider
  • Existing solution benchmarked by Gartner, showing cost in top decile
  • Significant user dissatisfaction with the service provided
  • Group IT simply want to extend current arrangement
Sourcing approach:
  • Detailed re-baselining of costs, using total cost of ownership (TCO) cost model, including all internal costs and activities
  • Examined global best practice managed desktop operating models, and imported a new operating model, with significantly higher performance and service level agreement requirements
  • Allowed the incumbent supplier a 'one shot at glory' exclusive bid against the new operating model design and against a new 'model' set of T&C's and SLAs
  • Failure to meet our internal IRR (Internal rated of Return) Model, the T&Cs or the SLAs would have resulted in the exclusivity being revoked
Solution:
  • Incumbent supplier made the IRR - just
  • Performance management framework implemented
  • 18 month implementation plan for new operating model agreed
  • Year on year productivity gains agreed
Outcome:
  • The proposed new contract reduced expected operating expenditure by 42% on a like for like basis over 5 years
  • Improved service levels significantly
  • Allowed divestment of the JV holding, providing income to the bottom line
  • Create credibility for Sourcing within Group IT that we could do deals that:
    Reduce cost
    Improve service
    AND didn't require major changes of suppliers and service risk
CASE STUDY 2: Telecommunications

Background & context:
  • A five year contract for synchronous data transfer services to support ABSA's branch network expired in 2007
  • A monopoly supplier of the service was in place, and service levels were sub-optimal
  • Exposure to one monopoly supplier, with no service level protection in the contract
  • The cost structure was dictated by the supplier and never challenged due to inflexible perceived regulatory Terms and Conditions
Sourcing approach:
  • Sourcing initiated a repositioning of the WAN technology to an MPLS solution
  • The above supplier participated in the bid and Sourcing used this RFP to place pressure on the supplier
  • On the back of the leverage of the WAN deal, the synchronous data transfer services infrastructure contract was negotiated with the potential view of migrating to the WAN
  • Existing T&C's were challenged with the expert help from specialist teleco lawyers who examined the tariff ( not services) charters
  • A total cost of ownership model was used to evaluate the true benefit of the deal
  • The negotiations were elevated to an executive and board level to get conclusion
Solution:
  • The existing contract was replaced by a well structured 6 year contract, which included key service, termination and migration clauses and concessions
  • A priority service policy for all of ABSA's critical sites was established by the supplier in order to improve service delivery, including infrastructure provisioning, resource management and customer communication interventions.
  • The contract renewal incorporated not only existing lines but upgrades and new circuits as ABSA branches expands
  • A Master Service Agreement was established to consolidate all other products and services from the same supplier under the same T&Cs
Outcome:
  • The proposed new contract:
    Reduced Absa's operating costs on a like-for-like basis by 21% over the term
    The costing structure was changed and T&C's were significantly revamped
    Service levels were significantly improved by the priority service policy
    SLA penalties were imposed
    A migration to the MPLS Wide Area Network was provided for at no charge
CASE STUDY 3: Hardware

Background and Context:
  • ABSA has a long standing relationship with a major provider of hardware, software, maintenance and professional services
  • Total spend with the supplier over the past three years was over R1bn, but managed under separate contracts
  • A new contractual structure with the supplier was sought by ABSA to simplify the existing arrangements
Sourcing Approach:
  • Historical spend over the past 3 years was calculated, and the next 3 years spend projected- based on known capacity growth and business requirements
  • Each major component of the spend was benchmarked in November 2006 by Gartner to show worldwide competitive positioning
  • All the supplier offerings/proposals were compared and leveraged at Barclays Group level to investigate viability of cross business cluster synergies and group wide spend
  • The negotiations were deliberately left hanging though 2006, with an intent to close the deal only late in December - at the supplier's known fiscal year end
Solution:
  • Consolidated all existing contracts and requirements into one master agreement
  • Using the promise of one consolidated contract, committed for 3 years, concessions were achieved in major commodity areas and pricing
  • A Revenue Based Agreement (RBA) discount structure was established based on level of spend over three years
  • Implemented a benefits tracking model, managing the spend in each area to reconcile monthly to ensure commitments are met
Outcome
  • Known 'best in class' pricing for each product set, plus a further significant discount (double digit) if certain spend thresholds are met
  • Leveraged the Barclays global demand and initiated the Global Framework Agreement for the group with the supplier
  • Reduced maverick spend and channeled most hardware through one supplier
CASE STUDY 4: Software - business intelligence

Background & context:
  • One supplier supplied business intelligence technology for Data Mining, Data Warehousing and Business Analytics for Basel2, NCA Analysis & CRM
  • The Software master License Agreement that was signed in 1993, was old and outdated
  • 33 different contract supplements existed for various business units with varying T&Cs
  • The software licenses were decentralized and various discount levels regardless of the collective ABSA spend.
  • An ABSA Group business intelligence strategy did not exist and there was duplication of functionalities across business units
Sourcing approach:
  • Consolidated all existing contract supplements under a Master Services Agreement
  • Leveraged the Barclays Global demand to negotiate a fixed discount structure for Annual Renewal Fee and a tiered discount for First Year Fee
  • Aligned the contract terms and conditions with ABSA financial year and Barclays contracts structure
Solution:
  • SAS was contracted as a preferred supplier for Business Intelligence software solutions
  • Consolidated all existing SAS licenses and aligned dates of renewal
  • A commercial commitment was made to SAS over the contract period
  • SAS was invited to innovate with ABSA business units in order to optimize its technology
Outcome:
  • Consolidated all existing SAS licenses and aligned dates of renewal
  • Savings of over 33% on a like for like basis have been achieved
  • Established a strategic business intelligence partnership with SAS
  • A common business intelligence platform was established for ABSA Group
LESSONS LEARNED THE HARD WAY:
  • Technologists are hard work to deal with unless they can see the value you bring
  • Shared ownership of the agenda and objectives between Sourcing and Technology is crucial
  • Sourcing must talk the language of technology, and have a blend of skills ( two thirds sourcing and one third technology) that can do this
  • Credibility does not come through cheap talk or promises - it only comes through delivery
  • Delivery does not come through luck - it comes through hard work, detailed analysis and a strong knowledge base
  • Finally, remember that...
.... Technology sourcing is 90% perspiration, 10% inspiration


Editors comment: Ian's present domicile in SA is a good example of the collateral benefits that arise from a Foreign Investment of the magnitude Barclays made in purchasing a 56% majority shareholding in the ABSA Group- it included the transfer into SA of key ( and scarce) global expertise and skills.

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