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Managing the IT Procurement Process
An IT procurement process, formal or informal, exists in every organization that acquires information technology. As users of information systems increasingly find themselves in roles as customers of multiple technology vendors, this IT procurement process assumes greater management significance. In addition to hardware, operating system software, and telecommunications equipment and services - information resources traditionally acquired in the marketplace - organizations now turn to outside providers for many components of their application systems, application development and integration, and a broad variety of system management services. Yet despite this trend, there has to date been little, if any, research investigating the IT procurement process.
DEVELOPMENT OF THE FRAMEWORK
In January 1994, the Society for Information Management (SIM) Working Group on Information Technology Procurement was formed to exchange information on managing IT procurement, and to foster collaboration among the different professions participating in the IT procurement process.
This chapter presents a model of the IT procurement process that was developed by the SIM Working Group to provide a framework for studying IT procurement. Specifically, the IT Procurement Process Framework was developed by a 12-member subgroup comprised of senior IT procurement executives from large North American companies. The task of developing the framework took place over the course of several meetings and lasted approximately one year. A modified nominal group process was used, in which individual members independently developed frameworks that described the IT procurement process as they understood it.
In a series of several work sessions, these individual models were synthesized and combined to produce the six-process framework presented below. Once the six major procurement processes had been identified, a modified nominal group process was once again followed to elicit the sub-processes to be included under each major process. Finally, a nominal group process was once again used to elicit a set of key issues, which the group felt presented managerial challenges in each of the six processes.
The key issues were conceived of as the critical questions that must be successfully addressed to effectively manage each process. Thus, they represent the most important issues faced by those executives responsible for the management of the IT procurement function.
The process framework and key issues were reviewed by the Working Group approximately one year later (summer 1996), and modifications to definitions, sub-processes, and key issues were made at that time. The key issue content analysis described below was conducted following a Working Group review in early 1997.
THE IT PROCUREMENT FRAMEWORK: PROCESSES, SUB-PROCESSES,
AND KEY ISSUES
The IT Procurement Process Framework provides a vehicle to describe systematically the processes and sub-processes involved in IT procurement. Exhibit 1 illustrates six major processes in IT procurement activities: three deployment processes (D1, D2, and D3) and three management processes (M1, M2, and M3). Each of these major processes consists of a number of sub-processes. The Appendix at the end of this chapter lists the sub-processes included in each of the major processes, as well as the key issues identified by the Working Group.
Exhibit 1. Major Processes in IT Procurement.
Deployment processes consist of activities that are performed (to a greater or lesser extent) each time an IT product or service is acquired. Each individual procurement can be thought of in terms of a life cycle that begins with requirements determination, proceeds through activities involved in the actual acquisition of a product or service, and is completed as the terms specified in the contract are fulfilled. Each IT product or service that is acquired has its own individual iteration of this deployment life cycle.
D1. Requirements determination is the process of determining the business justification, requirements, specifications and approvals to proceed with the procurement process. It includes sub-processes such as organizing project teams, using cost-benefit or other analytic techniques to justify investments, defining alternatives, assessing relative risks and benefits defining specifications, and obtaining necessary approvals to proceed with the procurement process.
D2. Acquisition is the process of evaluating and selecting appropriate suppliers and completing procurement arrangements for the required products and services. It includes identification of sourcing alternatives, generating communications (such as RFPs and RFQ) to suppliers, evaluating supplier proposals, and negotiating contracts with suppliers.
D3. Contract fulfillment is the process of managing and coordinating all activities involved in fulfilling contract requirements. It includes expediting of orders, acceptance of products or services, installation of systems, contract administration, management of post-installation services such as warranty and maintenance, and disposal of obsolete assets.
Management processes consist of those activities involved in the overall governance of IT procurement. These activities are not specific to any particular procurement event, but rather are generalized across all such events. Three general classes of IT procurement management processes are supplier management, asset management, and quality management.
M1. Supplier management is the process of optimizing customer-supplier relationships to add value to the business. It includes activities such as development of a supplier portfolio strategy, development of relationship strategies for key suppliers, assessing and influencing supplier performance, and managing communication with suppliers.
M2. Asset management is the process of optimizing the utilization of all IT assets throughout their entire life cycle to meet the needs of the business. It includes activities such as development of asset management strategies and policies, development and maintenance of asset management information systems, evaluation of the life cycle cost of IT asset ownership, and management of asset redeployment and disposal policies.
M3. Quality management is the process of assuring continuous improvement in the IT procurement process and in all products and services acquired for IT purposes in an organization. It includes activities such as product testing, statistical process control, acceptance testing, quality reviews with suppliers, and facility audits.
KEY IT PROCUREMENT MANAGEMENT ISSUES
The Appendix at the end of the chapter presents 76 key IT procurement management issues organized by process, that were identified by the members of the Working Group. These issues represent the beliefs of these domain experts concerning the most serious challenges facing managers of the IT procurement function. To better understand the key issues, a content analysis was performed to determine if there were a few main themes underlying these questions. The content analysis identified eight themes. The eight themes, their codes, and the frequency of occurrence are shown in Exhibit 2. These theme codes for each key issue also appear at the end of this chapter. The four themes that were the most important to senior procurement managers in the SIM Working Group are described below.
Exhibit 2. Eight Themes Identified from 76 Key Issues.
Process Management, Design, and Efficiency [P]
Practicing IT procurement managers are most concerned with the issue of how to make the procurement process more efficient. The questions that reflect this theme address the use of automated tools such as EDI and procurement cards, reduction of cycle time in contracting processes, development and use of asset tracking systems and other reporting systems, and the integration of sub-processes at early and later stages of the procurement life cycle. The emergence of process efficiency as the leading issue may indicate that procurement managers are under pressure to demonstrate the economic value of their organizational contribution, and thus follow the last decade's broad management trend of rigorously managing costs.
Measurement, Assessment, Evaluation [M]
The second most important theme concerns the search for reliable and valid ways to evaluate and assess performance. This search for useful assessment methods and measures is directed both at external suppliers and at the internal procurement process itself. The latter focus is consistent with the notion that procurement managers are looking for objective ways to assess and demonstrate their contribution. The focus on supplier assessment reflects an understanding that successful supplier relationships must be built on a foundation of high-quality supplier performance.
External Relationships [ER] and Internal Relationships [IR]
The third and fourth most frequently cited themes deal with the issue of creating effective working relationships. The importance of such relationships is an outgrowth of the cross-functional nature of the IT procurement process within organizations and the general transition from internal to external sources for information resource acquisition. N. Venkatraman and
L. Loh ( "The Shifting Logic of the IS Organization: From Technical Portfolio to Relationship Portfolio," Information Strategy: The Executive's Journal, Winter 1994, p.5-11.) characterize the information resource acquisition process as having evolved from managing a portfolio of technologies to managing a portfolio of relationships. The results of our analysis suggest that practicing managers agree.
A MANAGEMENT AGENDA FOR THE IT PROCUREMENT PROCESS
The process framework and key issues identified by the SIM IT Procurement Working Group suggest an agenda for future efforts to improve the management of the IT procurement process. The agenda contains five action items that may best be carried out through a collaboration between practicing IT procurement managers and academic researchers. The action items are:
- Develop IT procurement performance metrics and use them to benchmark the IT procurement process.
- Clarify roles in the procurement process to build effective internal and external relationships.
- Use the procurement process framework as a tool to assist in reengineering the IT procurement process.
- Use the framework as a guide for future research.
- Use the framework to structure IT procurement training and education.
Develop IT Procurement Performance Metrics and Use Them to Benchmark the IT Procurement Process
Disciplined management of any process requires appropriate performance metrics, and members of the Working Group have noted that good metrics for the IT procurement processes are in short supply. The process framework is currently providing structure to an effort by the Working Group to collect a rich set of performance metrics that can be used to raise the level of IT procurement management. In this effort, four classes of performance metrics have been identified:
- Effectiveness metrics
- Efficiency metrics
- Quality metrics
- Cycle time metrics
Closely related to the metrics development issue is the need felt by many procurement professionals to benchmark critical procurement processes. The framework provides a guide to the process selection activity in the benchmarking planning stage. For example, the framework has been used by several companies to identify supplier management and asset management sub-processes for benchmarking.
Clarify Roles in the Procurement Process to Build Effective Internal and External Relationships
IT procurement will continue to be a cross-functional process that depends on the effective collaboration of many different organizational actors for success. Inside the customer organization, representatives of IS, legal, purchasing, finance, and user departments must work together to buy, install, and use IT products and services. Partnerships and alliances with supplier and other organizations outside the boundaries of one's own firm are more necessary than ever as long-term outsourcing and consortia arrangements become more common. The key question is how these multifaceted relationships should be structured and managed.
Internally, organizational structures, roles, standards, policies, and procedures must be developed that facilitate effective cooperation. Externally, contracts must be crafted that clarify expectations and responsibilities between the parties. Recent research, however, suggests that formal mechanisms are not always the best means to stimulate collaboration. The most useful forms of collaboration are often discretionary -- that is, they may be contributed or withheld without concern for formal reward or sanction (Heckman, R. and Guskey, A. (1997), "The Relationship between University and Alumni: Toward a Theory of Discretionary Collaborative Behavior," Journal of Marketing Theory and Practice). Formal job descriptions, procedures, and contracts will never cover all the eventualities that may arise in complex relationships. Therefore, managers must find the cultural and other mechanisms that create environments which elicit discretionary collaboration both internally and externally.
Use the Procurement Process Framework as a Tool to Assist in Reengineering the IT Procurement Process
Another exciting use for the framework is to serve as the foundation for efforts to reengineer procurement processes. One firm analyzed the sub-processes involved in the requirements analysis and acquisition stages of the procurement life cycle to reduce procurement and contracting cycle time. Instead of looking at the deployment sub-processes as a linear sequence of activities, this innovative company used the framework to analyze and develop a compression strategy to reduce the cycle time in its IT contracting process by performing a number of sub-processes in parallel.
Use the Framework as a Guide for Future Research
The framework has been used by the SIM IT Procurement Working Group to identify topics of greatest interest for empirical research. For example, survey research investigating acquisition (software contracting practices and contracting efficiency), asset management (total life-cycle cost of ownership and asset tracking systems), and supplier management (supplier evaluation) has been recently completed. The key issues identified in the current chapter can likewise be used to frame a research agenda that will have practical relevance to practitioners.
Use the Framework to Structure IT Procurement Training and Education
The framework has been used to provide the underlying structure for a university course covering IT procurement. It also provides the basis for shorter practitioner workshops, and can be used by companies developing in-house training in IT procurement for users, technologists, and procurement specialists.
This five-item agenda provides a foundation for the professionalization of the IT procurement discipline. As the acquisition of information resources becomes more market oriented and less a function of internal development, the role of the IT professional will necessarily change. The IT professional of the future will need fewer technology skills because these skills will be provided by external vendors that specialize in supplying them. The skills that will be critical to the IT organization of the future are those marketplace skills which will be found in IT procurement organizations. The management agenda described in this chapter provides a first step toward the effective leadership of such organizations.
DEVELOPMENT OF THE FRAMEWORK
Deployment Process D1: Requirements Determination Process Definition
The process of determining the business justification, requirements, specifications, and approvals to proceed with the procurement process.
- Identify need.
- Put together cross-functional team and identify roles and responsibilities.
- Continuously refine requirements and specifications in accordance with user needs.
- Gather information regarding alternative solutions.
- Perform cost-benefit analysis or other analytic technique to justify expenditure.
- Evaluate alternative solutions (including build/buy, in-house/outsource, etc.) and associated risk and benefits.
- Develop procurement plans that are integrated with project plans.
- Gain approval for the expenditure.
- Develop preliminary negotiation strategies.
Key Issues [Themes]
- What are the important components of an appropriate procurement plan? [S]
- How much planning (front-end loading) is appropriate or necessary for different types of acquisitions (e.g., commodity purchases versus complex, unique acquisitions)? [S]
- How should project teams be configured for different types of acquisitions (appropriate internal and external resources, project leader, etc.)? [IR]
- How should changes in scope and changes in orders be handled? [P]
- What are the important costs versus budget considerations? [F]
- What are the most effective methods of obtaining executive commitment? [E]
- Can requirements be separated from wants? [P]
- Should performance specifications and other outputs be captured for use in later phases, such as quality management? [P]
Deployment Process D2: Acquisition Process Definition
The process of evaluating and selecting appropriate suppliers and completing procurement arrangements for the required products and services.
- Develop sourcing strategy, including the short list of suitable suppliers.
- Generate appropriate communication to suppliers (RFP, RFQ, etc.), including financing alternatives.
- Analyze and evaluate supplier responses and proposals.
- Plan formal negotiation strategy.
- Negotiate contract.
- Review contract terms and conditions.
- Award contract and execute documents.
- Identify value added from the negotiation using appropriate metrics.
Key Issues [Themes]
- Is there support of corporate purchasing programs, policies, and guidelines (which can be based on technology, financing, accounting, competitive impacts, social impacts, etc.)? [E]
- What tools optimize the procurement process? [P]
- Procurement cards
- What processes in the acquisition phase can be eliminated, automated, or minimized? [P]
- Is it wise to be outsourcing all or part of the procurement process? [IR]
- What are the appropriate roles of users, legal, purchasing, and IS in the procurement process? [IR]
Deployment Process D3: Contract Fulfillment Process Definition
The process of managing and coordinating all activities involved in fulfilling contract requirements.
- Expedite orders and facilitate required changes.
- Receive material and supplies, update databases, and reconcile discrepancies.
- Accept hardware, software, or services.
- Deliver materials and services as required, either direct or to drop-off points.
- Handle returns.
- Install hardware, software, or services.
- Administer contract.
- Process invoices and issue payment to suppliers.
- Resolve payment problems.
- Manage post-installation services; e.g., warranty, maintenance, etc.
- Resolve financial status and physical disposal of excess or obsolete assets.
- Maintain quality records.
Key Issues [Themes]
- What are some provisions for early termination and renewals? [L]
- What are the best methods for assessing vendor strategies for ongoing maintenance costs? [ER]
- What interaction between various internal departments aids the processes? [IR]
Management Process M1: Supplier Management Process Definition
The process of optimizing customer-supplier relationships to add value to the business
- Categorize suppliers by value to the organization; e.g., volume, sole source, commodity, strategic alliance. Allocate resources to most important (key) suppliers.
- Develop and maintain a relationship strategy for each category of supplier.
- Establish and communicate performance expectations that are realistic and measurable.
- Monitor, measure, and assess vendor performance.
- Provide vendor feedback on performance metrics.
- Work with suppliers to improve performance continuously; know when to say when.
- Continuously assess supplier qualifications against requirements (existing and potential suppliers).
- Ensure relationship roles and responsibilities are well-defined.
- Participate in industry/technology information sharing with key suppliers.
Key Issues [Themes]
- How does anyone distinguish between transactional/tactical and strategic relationships? [ER]
- How can expectations on both sides be managed most effectively? Should relationships be based on people-to-people understandings, or solely upon the contractual agreement (get it in writing)? What is the right balance? [ER]
- How can discretionary collaborative behavior - cooperation above and beyond the letter of the contract - be encouraged? Are true partnerships with vendors possible, or does it take too long? What defines a partnership? [ER]
- How should multiple vendor relationships be managed? [ER]
- How should communication networks (both internal and external) be structured to optimize effective information exchange? Where are the most important roles and contact points? [IR]
- How formal should a measurement system be? What kind of report card is effective? What are appropriate metrics for delivery and quality? [M]
- What is the best way to continuously assess the ability of a vendor to go forward with new technologies? [M]
- What legal aspects of the relationship are of most concern; e.g., nondisclosure, affirmative action, intellectual property, etc.? [L]
- What is the best way to keep current with IT vendor practices and trends? What role does maintaining market knowledge play in supplier management? [M]
- What is the optimal supplier-management strategy for a given environment? [S]
- How important is the development of master contract language? [L]
- In some sectors there is an increasing number of suppliers and technologies, although in the others vendor consolidation is occurring. Under what circumstances should the number of relationships be expanded or reduced? [ER]
- What are the best ways to get suppliers to buy into master agreements? [L]
- What are the best ways to continuously judge vendor financial stability? [M]
- Where is the supplier positioned in the product life cycle? [M]
- How should suppliers be categorized (e.g., strategic, key, new, etc.) to allow for prioritization of efforts? [M]
- What are the opportunities and concerns to watch for when one IT supplier is acquired by another? [M]
Management Process M2: Asset Management Process Definition
The process of optimizing the utilization of all IT assets throughout their entire life cycle to meet the needs of the business
- Develop and maintain asset management strategies and policies. Identify and determine which assets to track; they may include hardware, software licenses, and related services.
- Implement and maintain appropriate asset management databases, systems, and tools.
- Develop a disciplined process to track and control inventory to facilitate such things as budgeting, help desk, life-cycle management, software release distribution, capital accounting, compliance monitoring, configuration planning, procurement leverage, redeployment planning, change management, disaster recovery planning, software maintenance, warranty coverage, lease management, and agreement management.
- Identify the factors that make up the total life-cycle cost of ownership.
- Communicate a software license compliance policy throughout the organization.
Key Issues [Themes]
- What assets are included in IT asset management; e.g., human resources, consumables, courseware)? [F]
- How can legal department holdups be reduced? [P]
- What is the best way to communicate corporate-wide agreements? [IR]
- How should small ticket assets be handled? [P]
- How does a company move from reactive to proactive contracting? [S]
- Are there ways of dealing with licenses that require counts of users? [L]
- What are the best ways of managing concurrent software licensing? [L]
- Can one be contracting for efficiency using national contracts for purchase, servicing, licensing? [P]
- How can software be managed and tracked as an asset? [F]
- How can the workload in software contracting be reduced? [P]
- Are there ways to encourage contract administration to be handled by the vendor? [P]
- Is it possible to manage all three life cycles simultaneously: technical, functional, and economical? [S]
- How does a company become proactive in risk management? [S]
- What is the appropriate assignment of internal responsibilities; e.g., compliance? [IR]
- Do all items need to be tracked? [P]
- How much control (a) can the company afford? (b) does the company need? (c) does the company want? [F]
- What are the critical success factors for effective asset management? [S]
- What practices are most effective for the redeployment of assets? [P]
- Are there adequate systems available to track both hard and soft assets? Are there any integrated solutions (support, tracking, and contract management)? [P]
- What are the best ways to handle the rapid increase in volume and rapid changes in technology? [P]
- What is the appropriate reaction to dwindling centralized control of the desktop with nonconformance to guidelines and procedures? [IR]
- Is there a true business understanding of the total cost of ownership over the entire life cycle of an asset? [F]
- What are the impacts on organizational structure? [IR]
- What kind of reporting is most effective? [P]
- How can one manage tax issues - indemnification, payments, and insurance issues? [F]
- What issues should be considered in end-of-lease processes? [P]
Management Process M3: Quality Management Process Definition
The process of assuring continuous improvement in all elements of the IT procurement framework
Sub-processesDefine and track meaningful process metrics on an ongoing basis.
Conduct periodic quality reviews with suppliers:
Collect and prioritize ideas for process improvement.
Use formal quality improvement efforts involving the appropriate people:
- Provide formal feedback to vendors on their performance.
- Facilitate open and honest communication in the process.
Recognize and reward quality improvement results on an ongoing basis:
- Participants may include both internal resources and vendor personnel.
Audit vendors' facilities and capabilities.
Conduct ongoing performance tests against agreed upon standards; e.g., acceptance test, stress test, regression test, etc.
Utilize appropriate industry standards; e.g., ISO 9000, SEI Capability Maturity Model.
Periodically review vendors' statistical process control data.
- Recognize nonperformance/unsatisfactory results.
Key Issues [Themes]
- What is the best way to drive supplier quality management systems? [ER]
- What is the appropriate mix of audits (supplier/site/regional, etc.) for quality and procedural conformance? [M]
- What is the importance of relating this process to the earliest stages of the requirement determination process? [P]
- What corrective actions are effective? [P]
- When and how is it appropriate to audit a supplier's financials? [M]
- What is an effective way to audit material or services received? [M]
- What is the best way to build quality assurance into the process, as opposed to inspecting for quality after the fact? [P]
- What metrics are the most meaningful quantitative measures? [M]
- How can one best measure qualitative information, such as client satisfaction? [M]
- When should one use surveys, and how can they be designed effectively? [M]
- How often should measurements be done? [M]
- How does one ensure that the data collected is valid, current, and relevant? [M]
- What is the best medium and format to deliver the data to those who need it? [P]
- What are used as performance and quality metrics for the IT procurement function? [M]
- How does one effectively recognize and reward quality improvement? [ER]
- When is it time to reengineer a process rather than just improve it? [P]
- How much communication between vendor and customer is needed to be effective? [ER]