If you own too many products from too many suppliers (who are chasing too many buyers), it's likely that you're absorbing some needless costs. A typical Fortune 500 company can easily spend 10% to 15% beyond what it really needs in IT products and services.
One of my clients, with an annual IT budget of $250 million, used to spend $150 million on suppliers. That was reduced by $19 million, or more than 12%, through a supplier portfolio management program, cutting the overall IT budget more than 7%.
In 1985, managing suppliers was simpler. Most companies relied on only two or three critical vendors: IBM, AT&T and a minicomputer manufacturer. As technology options emerged, companies rushed to experiment with hundreds of IT products. Today, the average Fortune 500 company buys from as many as 10,000 suppliers, 30 to 40 of them critical. Many companies underestimate the number of suppliers in their portfolios. For instance, a pharmaceutical company recently reviewed its portfolio and found 30,000 domestic IT suppliers - 22,000 more than it originally estimated.
The number of technology buyers has also escalated. In recent years, the average Fortune 500 company might have allowed 100 people to buy IT products and services. Today, the same company may have more than 400 staffers involved in buying, many of them outside the IT organization. What happens when you allow hundreds of buyers to make thousands of uncoordinated buying decisions? You get an overly complex portfolio that makes architectural goals almost impossible to achieve.
Having a large portfolio is expensive. Uncoordinated buying decisions make it difficult to achieve economies of scale, and costs can soar in the following areas:
- Procurement. Selection, negotiation, contracting and fulfillment are time- consuming and expensive.
- Relationship management. Performance measurement and ongoing communications with suppliers require significant staff time.
- Product integration. The more products you have, the more time you must spend making them work together.
- Support. Each product must be installed, upgraded and maintained. Users and technical staff must be trained.
- Accounts payable. It's surprisingly expensive to pay an invoice. The invoice must be validated to ensure that all of the products have been received, discounts and allowances taken, and outstanding credits from prior payments applied. With all those steps, a typical large company spends $30 to pay each bill.
Since these costs are incurred with each supplier, you'll reap significant savings with every supplier you eliminate. Be rigorous, but don't be so zealous that you kill all technical experimentation.
Here are some specific steps to begin creating a supplier portfolio management program:
- Create a baseline inventory of all IT suppliers. Indicate how much you pay each of them annually and the products and services each provides. Remember to count the "invisible invaders" - suppliers whose products are buried in equipment, or those you inherit when a supplier merges with or is acquired by another company.
- Develop a sourcing strategy. Analyze your supplier portfolio for compliance with your IT architecture, along with product gaps and overlaps. Select a primary and secondary supplier for each architectural component, and devise plans to eliminate the others. Then, renegotiate more favorable contract terms with your primary suppliers in exchange for giving them more business.
- Develop standards to match buying decisions with your architecture and guide procurement personnel. If you don't, you're opening the door to technological chaos.
- Standardize the buying process to coordinate enterprisewide buying decisions.
- Manage the suppliers. After the purchase, actively manage your suppliers to make sure you get what you're paying for.
Most corporations simply negotiate one deal after another in isolated buying decisions. This approach misses the leverage you can achieve by managing your suppliers collectively in a streamlined portfolio. An effective supplier portfolio management program will result in fewer buyers and suppliers, and far less cost.
BART PERKINS, a former CIO at Tricon Global Restaurants Inc. and Dole Food Co., is managing partner at Leverage Partners Inc. in Louisville, Ky., which helps CIOs manage their IT suppliers.