Value judgement

Value judgement

Short-term financial pressures have forced CIOs to cut costs where possible. But the tough times may permanently improve buying habits.

Information technology budgets have been under severe pressure recently, courtesy of the global financial crisis. So it is hardly surprising that chief information officers are leaning on vendors for sharper pricing or better service levels. Improvements in either area create better value for money, at a time when CIOs need all the help they can get in meeting the growing expectations of their businesses with dwindling resources.

But once all avenues for improving cost efficiency have been exhausted, focus turns to reassessing relationships with key vendors and finding innovative ways to measure their performance based on business metrics instead of IT functionality.

Matt Mansour is something of a rarity in these strained times. As the CIO for financial services company GE Capital, he is embarking on a $200 million IT transformation that is scheduled for completion in three years (see “GE Capital aims for cheaper, faster, smarter”, page 9).

It’s a significant financial commitment, especially when many other organisations are delaying or cancelling projects, and Mansour intends to ensure he gets maximum value from his investment.

“We’re going through similar IT processes as the major banks on core modernisation,” he says. “But with the economy taking the turn it has, our conversations with vendors on some of the larger programs of work are about how they’re stepping up to help us.”

Central to Mansour’s new purchasing strategy is a move away from service level agreements (SLAs) to vendor relationships that are based on operational risk.

For example, a system running GEC’s credit cards might be up 99 per cent of the time, which meets an SLA but still leaves customers unable to access account data for a couple of days a year. That time can be equated into operational dollars and, if it is the vendor’s fault, that supplier is expected to step up with some form of credit or compensation.

While asking vendors to take more responsibility, Mansour also wants to reward those that exceed expectations. He has signed a profit-sharing agreement with one supplier, which will get to keep half the money if it helps GE Capital hit a target to reduce network management costs by 5 per cent during

the year.

It is an approach that gives suppliers a greater incentive to make sure their services are as robust as possible, and CIOs are likely to adopt it increasingly as they look to wring every possible dollar of value out of their vendor relationships.

”It comes back to themes of simplification, transparency and consolidation,” Mansour says. “As we move through the global financial crisis and things start to settle down, we need to focus on key vendors.

“When making those sorts of demands of your vendors, you need transparency, so that they’re working in your business to understand what your operational risks are and you get the right outcomes.

“If anything, key vendors will be brought into much closer partnerships because it’s going to be absolutely critical, as we look at investment dollars or even just running costs, to work out how you can get the best bang for your buck.

“It’s not about cutting costs or squeezing [vendors] on price; it’s how you transform the way you’re doing things.”

Different strokes

Gartner vice-president for sourcing, procurement and IT asset management, Mike Lafford, says CIOs are increasingly slotting their vendors into four categories – strategic, commodity, emerging or tactical – and tailoring their approaches to dealing with these different groups.

While some information chiefs in the past may have relied on spending levels as the only indicator of a vendor’s importance to their organisation, more mature buyers take the concept of vendor management much more seriously these days.

They are looking to drive hard financial bargains when purchasing commodity products such as PC and server hardware, but taking a much more partner-based approach to discussions with service providers that are considered strategically important.

“Wherever there’s a service contract, we’re advising clients to look at multiple factors in the relationship and try not to focus too much on price,” Lafford says. “Whenever we see pressure being applied to the price of service contracts, short cuts get taken, quality goes down and the client is generally unhappy with the resulting poor service.”

Gartner is researching vendor risk management to help CIOs decide which ones to engage and how closely to partner with them. Lafford says the difficulties for BearingPoint and Nortel in the past year show how important it is to have an idea of an organisation’s long-term viability. Many vendors have had customers cancel or postpone work as chief financial officers and CIOs review the business cases for IT projects.

Other trends that Lafford notes include CIOs signing shorter contracts to retain greater flexibility, making better use of benchmarking, and piloting alternative, web-based service delivery models.

“Shorter contracts offer greater flexibility to move away from existing suppliers,” he says. “People often ask ‘What is the best time to think about exiting from a contract — six months out, 18 months out?‘

“The answer is ‘before you sign it’, because you should have an exit strategy well defined. Shorter contracts can be seen as a carrot and stick. If the vendor doesn’t deliver in the first couple of years, you can start working on a structured transition.”

Jetstar has outsourced a lot of its information technology project and service delivery, which gives it the ability to react quickly when market conditions change.

“If the business wants to shut down projects, then I just turn the taps off and we’re back to raw business-as-usual levels,” Jetstar CIO Stephen Tame says. “You pay a little more for those services sometimes but it’s worth it for the flexibility.”

Measure up

Contract management has typically focused on key performance indicators for things such as infrastructure availability, network traffic or the number of calls handled in a customer contact centre but Lafford says there has been a rise in the number of performance management clauses that use business metrics, rather than those based on technology. This puts the focus on business outcomes, instead of IT availability.

For example, Lafford says, a large North American airline approached Gartner wanting to change its contract metrics. A chat with the CFO soon made it clear that on-time departure was a key ways that the business measured performance because take-off and landing fees made it a real cost driver. Gartner helped it map all IT service provisions to every business process responsible for handling on-time departure. The company then rewrote supplier contracts along those lines.

Some organisations are also looking at relationships between IT suppliers and introducing operating level agreements.

“OLAs make vendors sign up for how they’ll govern relationships with each other, to the point where rewards and penalties can be shared,” Lafford says. “Buyers are becoming a little more informed about what is needed, not just to manage costs but also delivery and value from suppliers.”

Although the global financial crisis has brought challenges, NRMA Motoring & Services CIO Craig Gibbons argues that it has also swung the pendulum back in favour of information chiefs, both as employers and in negotiations with vendors.

The downturn has forced him to revisit his contracts and he makes no apologies for asking suppliers to lower prices. He says the market conditions will force a resetting of many vendor-client relationships to make them far more sustainable.

“Anyone in the vendor market now who doesn’t realise the need to listen to clients and understand them really well, instead of selling their products hard, is doing themselves a disservice,” he says.

“We don’t buy stuff now — we explain our needs and let people tell us how they’re going to meet them. It’s a bit more mature than it was because you can’t afford to be experimental with big chunks of money.”

Bank of Queensland group executive of IT and operations Jim Stabback says it’s important to remember that suppliers are also under pressure to maintain their performance. In a real partnership, both sides need to find a way to be successful.

“We can only do that in an open, constructive dialogue that recognises some of the challenges we face,” he says. “We’ve been fortunate enough to work through conversations with our service providers without losing sight of what’s important.

“In the context of a difficult [economic] environment, it’s often useful to review those, to decide which are important and which we can afford to be a little more flexible with to give the provider a chance to reinvest or maintain their momentum without compromising our performance.”

GEC’s Mansour makes a similar observation. He says some of his vendor conversations have been based on services that were provided but added little or no value for his company. Cutting those back was an easy way to reduce unnecessary cost.

Time for change

One of the most important aspects of the downturn could be how long it takes the market to recover. Germany’ SAP has taken a closer look at previous recessions, chief value officer Chakib Bouhdary says, and the data suggests that it typically takes about two and a half times as long for the market to recover as it does to hit rock bottom.

If it takes as long this time, he says, we’re looking at a multi-year recovery that could well change buying habits permanently.

“When you have a downturn for six months, people forget and go back to bad habits,” he says. “What’s happening with this downturn is that there is plenty of time to take on best practice and much of it requires technology investment in standardisation.

“Our business is soft and revenue is low but the number of transactions we do with customers is strangely high because people are buying what they need now. We feel the business is changing and it’s a new model we have to adapt to.”

More CIOs are stepping up the use of shared services and standardising pro-cesses to make operations leaner, Bouhdary says. “Most executives have never been through such a downturn, so there’s a new management style that we haven’t seen before. Many companies will [emerge from the GFC] leaner, better and smarter, so others will be forced to adapt or die.”

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Tags strategyCIO rolechange managementvendor managementeconomic crisis

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