January 30, 2013

Transforming Supply Chain Economics

Two things are apparent in the technology economics of the IT supply chain. First, the foundation of future deals must capture lessons learned from the constraints of the past. It is essential that organizations first create a "deal portfolio" that clearly shows all commitments, timings, volumetric assumptions, termination penalties, and so on -- covering at least 80% of contract commitments.

Next, the organization needs to identify the constraining factors in these deals and where current internal trends (again along the lines of volumes, cost structure, funding, etc.) are counter to the current deal portfolio.

And finally, the organization needs to put together an end state model of where it needs to be and then identify required deal intervention points.

Define Your New Contract Principles

To avoid the pitfalls of past deals, some new guiding principles are needed. The purpose of these principles is to provide a foundation for needed agility: Deals cannot contain lock-ins created by termination fees, volume growth rates, or dependencies with other contracts.

To more effectively and efficiently manage the IT supply chain, a new model is likely needed.

Lessons learned from outside the financial services sector in retailing and manufacturing, clearly tell the story of the strategic value of effective supply chain management. Companies such as Wal-Mart have learned to leverage supplier know-how and talent to increase the efficiency of their own business by leveraging a model in which suppliers and vendors manage others who offer complementary services, while fostering fierce competition that provides continuous value to them as well.

These companies have found success using category management - a systematic, disciplined approach to managing a product category as a strategic business unit. In the IT supply chain, like in retail, categories are easily defined and might include contract labor, storage, processing and end-user devices. Yet category management has not been adopted by the IT community.

Wal-Mart and other retailers have also successfully used the concept of category "Captains," where one particular supplier into a category is nominated by the retailer as a category captain, who is expected to have the closest and most regular contact with the retailer as well as investing time, effort, and often funds in the strategic development of the category within the retailer.

In return, the supplier will gain a more influential voice with the retailer. The category captain is often the supplier with the largest turnover in the category. In order to do the job effectively, the supplier may be granted access to a greater wealth of data-sharing, e.g. more access to an internal sales database.

The category Captain is a highly desirable position for any vendor. That desirability itself is a key lever for the IT organization. Clever retailers make it clear that captainship is a highly contended honor -- other vendors will vie for that position by showing they can do more. The "more" is more analysis of your supply chain, more analysis of options, more optimization of that category -- and all at the Captain's expense.

Vendors Need to be Proactive

Those on the sell-side play a significant role in this transformation too. New offers to clients and contract structures offering agility should be put on the table sooner than later. New models that accept rapid technology change and market uncertainty need to be crafted. New sources of value creation (like offering to be a category Captain) need to be communicated and implemented.

A New Technology Marketplace

IT organizations today are stressed to find ways to optimize costs and increase value in the face of uncertain market trends and complex regulatory pressures. Most current efforts to meet these challenges have focused on labor arbitrage, downsizing, outsourcing, and contract renegotiation.

There is an apparent opportunity to transform the economics of IT by going beyond this standard practice. The path, in part, is to “Follow the Money” (the money that goes outside) and adopt supply chain principles and new vendor management models to optimize expense outflows and their value. And while this may seem onerous to suppliers, who are already facing enough market pressures, the opportunity to make new offers to create new forms of value to customers may transform the supply-side in the technology marketplace itself.

The transformation of IT supply chain management, vendor management, and the nature of deals being offered by vendors and suppliers points the way to a new technology marketplace. Those that reach the frontiers of this new model first stand to prosper and attain competitive advantage. At that frontier we may see yet another transformation itself -- the start of “futures” markets in the form of IT “commodity” exchanges for processing, storage, labor, and more. It is not question of "if" this will occur; it is a matter of "when."

Dr. Howard A. Rubin is a Professor Emeritus of Computer Science at Hunter College of the City University of New York, a MIT CISR Research Affiliate, a Gartner Senior Advisor, and a former Nolan Norton Research Fellow. He is the founder and CEO of Rubin Worldwide.

Dr. Howard A. Rubin is a Professor Emeritus of Computer Science at Hunter College of the City University of New York, a MIT CISR Research Affiliate, a Gartner Senior Advisor, ...