Absa’s Head of Procurement – Digital Solutions, Innovation & Technology, Craig Vaughan, talks to SmartProcurement about the evolution of procurement right up to the age of Information Technology (IT) sourcing, and how professionals in the industry can extract maximum value by embracing Technology Business Management (TBM).
The role of procurement or sourcing teams has evolved over many years. Starting in the 1970s, and right through to the 1980s when the oil crisis focused many organisations on ensuring materials were available, there was a key shift in how procurement and its role in business strategy was viewed. Procurement evolved into a supportive role ensuring material quality and availability requirements were met.
From the 1990s onwards, procurement began to be integrated into the strategic planning process of organisations, and started to influence decision making and the focus to develop effective supplier relationships. The strategic significance of procurement has expanded as organisations recognise that suppliers are crucial to achieving their business objectives. The expectation of business teams, and indeed of procurement teams themselves, has not always moved with these changes.
Information Technology has become critical to many businesses. With the rise of cloud computing, automation and digitisation, the procurement of these technologies has become critical to all types of organisations. In fact, in many organisations, the business would simply not exist without technology.
Many organisations look to procurement to unlock value
With IT as a cost centre, procurement teams have maintained a focus on cost efficiency in the procurement processes. In a 2019 Harvard Business Review Webinar, Caperton Flood estimated that 40% the value to be realised lies in the “buying better” category. This includes the traditional procurement levers of cost negotiations, volume and economy of scale, and managing pricing risks. And while there is nothing wrong with these elements and approaches, it clearly implies a large deal of untapped value. For some organisations, this is where the expectation of Procurement ends, as they maintain the traditional and historical views of procurement. Some procurement organisations themselves have not graduated beyond these elements, either as a result of a lack of competency, focus or effectiveness in executing these elements, or as a result of lack of a strategic intent to move to the next level.
There are of course a plethora of approaches to unlocking value, ranging from contract management, supplier relationship management and Total Cost of Ownership (TCO models) to advanced analytics, robotic process automation and machine learning. Some procurement organisations are refocusing their efforts to take a more strategic approach to creating value. This moves beyond just negotiating better prices. It involves companies improving processes, optimising the supply chain, controlling and managing demand and ultimately understanding and maximising the value chain.
Understanding the landscape
In 2011, Marc Andreessen famously coined the term “software is eating the world” in his Wall Street Journal article. His prediction was that software companies would disrupt traditional industries. The rise of Amazon, Netflix and numerous Tech startups have shown us that the traditional approaches and requirements have been superseded by fast moving, “agile” requirements. Software spend across many industries is replacing spending on other goods and services.
The changing importance of technology has meant that business owners need to pay more attention to the criticality of technology, much of which is procured. Even where organisations have strong IT and digital functions, there is still a variety of underlying technology which comes from third parties. The role of IT procurement has moved from a “back office”, administrative or compliance function”, to a place where it can add strategic value to the organisation. Forward thinking technology organisations are bringing their procurement leaders to the table as a partner and not just an enabler.
The historical dichotomy between “business” and “technology” means that in many organisations, these two sections of the same team speak different languages – a worst case scenario. If you are fortunate enough, you may have teams that speak different “dialects” and therefore can at least communicate to a greater extent. In order to improve the alignment in the tri-party relationship between business, technology and procurement we need a common language or vocabulary- it is the glue to keep everyone aligned to IT sourcing.
Technology Business Management
According to the Technology Business Management (TBM) Council, TBM is a discipline that improves business outcomes by giving organisations a consistent way to connect business value to technology investments. Adopted by leading organisations around the world, TBM is backed by a standardised taxonomy for mapping technology assets and resources to business outcomes. The critical element here is creating a single source of the truth that all parts of the organisation can understand whether they are from IT, finance, procurement or business.
The linkage between IT costs and business value through structured cost analysis within a defined framework, enables a deeper level of engagement, better understanding, and ultimately the power to make trade-offs and decisions that are aligned to business value.
For procurement organisations, this moves the conversation past cost, into one of IT sourcing and value. Value for money becomes more important than per unit cost. Decisions to stop spending in one area are made in order to spend more in other areas where there is greater return and value. For IT organisations, TBM can improve the trust that the rest of the business has in them.
The TBM Council articulates the goals of TBM as follows:
- Accelerate your digital transformation with a product-centric mindset that leverages cloud and agile practices, by:
- Removing dependencies of legacy operating models
- Supporting transition from projects to products
- Accelerating your cloud journey
- Make data-driven decisions in real-time to capitalise on market opportunities, by:
- Breaking down information and “language” barriers
- Having a shared source-of-truth for decision making
- Building trust across business, finance, and IT
- Align business, financial, and technology leaders for faster execution and to drive value with every dollar invested in technology, by:
- Re-evaluating investment priorities based on business outcomes
- Running more efficiently and maximising your technology budget
- Running more effectively and gaining maximum return
Through the use of a standardised taxonomy and framework, organisations can bring into agreement often disparate and contentious definitions of IT cost components. The common language ensures that everyone, both IT and non-IT stakeholders alike, understand terms like server and compute, for example, in the same way and assign the same meaning to them. It will also help in standardising the costing methods and approaches.
A significant benefit of using a standardised methodology, is the opportunity to use benchmarking and trending of your costs to accurately compare within the different organisational units, and indeed across competitor organisations. This can include comparing unit costs of different technologies (for example virtual server costs or per GB costs for storage and backup between a business unit, supplier or even data centre). The trending of this cost data over time or as ratios (e.g. cost per employee), while not dissimilar to a cost analysis in a category strategy, is focused on those costs aligned to the business effort and value, rather than purely just cost as a measure. Ultimately, it is about being able to discuss and make decisions on IT sourcing based on information that makes sense – and matters – to business.
Whether or not your organisation employs a formal methodology, framework or software to enable this, the strategic importance of a shared vocabulary, together with the clear focus on value discussions is what unlocks the value for an organisation. In linking technology elements, and therefore the cost thereof, to business outcomes and value, procurement teams are then able to focus purchasing decisions around value erosion or value creation.
Competing priorities amongst technology and business leaders within the same organisation can now be traded off, based on the impact to the organisation. Rather than being focused around a cost optimisation agenda, procurement can focus on “value for money” conversations. In some cases, organisations may find they are prepared to invest more on certain technology and IT sourcing, where it visibly and directly links to better achievement of the business objectives.
Whether you want to know if you are paying too much for technology services, buying more than you need, or trying to determine outliers in terms of your technology spend; moving past a cost focus into a value focus will drive organisational value and elevate the strategic value delivery of the procurement organisation.
By Craig Vaughan, Head of Procurement – Digital Solutions, Innovation & Technology, Absa Group
Craig’s career spans over 20 years in banking organisations on the African continent, focused on Technology and procurement roles, including IT strategy, architecture, service delivery, internal consulting and IT Sourcing. Craig worked on the separation project between Absa and Barclays and oversaw the localisation of hundreds of technology suppliers from Barclays to Absa. Craig is passionate about driving digitisation and the adoption of technology in order to realise value across all areas of business.