January 31, 2014
Transformation Should Focus On Improving Outcomes, Not Merely On Increasing Competition
I’ve spoken with many IT Procurement leaders in public sector organizations ranging from US county schools districts to national governments. Most are prevented from applying best practices such as Strategic Software Sourcing by their politicians’ ill-conceived edicts and directives, such as those included in this announcement by the UK’s Cabinet Office that optimistically claims “Government draws the line on bloated and wasteful IT contracts”. In related press interviews the relevant minister Francis Maude complained that “a tiny oligopoly dominates the marketplace” and talked about his intention to encourage use of open source alternatives to products such as Microsoft Office, to increase competition and to divert more spend to small and medium-sized IT companies. The new edicts include bans of contracts over £100 million or 2 years’ duration and of automatic renewals. Mr. Maude claims these rules “will ensure the government gets the best technology at the best price”.
Mr. Maude and his team have a laudable and important goal but their approach is misguided, in my opinion. Short term contracts, indiscriminate competition and avoiding sole source category strategies will deliver neither the best technology nor the best price, because:
· Too much competition deters the best suppliers from bidding. The government’s own consultation exercise found that businesses were concerned about the cost of responding to official RFP when there was a low chance of winning among a large field of competitors. There is a serious danger that only the desperate will enter a race with possibly dozens of other runners, with the winner being the one who has most badly underestimated what it will take to complete the project. The best providers can get enough business from good customers so they don’t need to bet on long shots.
· It also removes the supplier’s main incentive to do a good job. Technology procurement teams need to abandon their obsession with cost and focus instead on creating the basis for successful projects. That means baking in rewards for achieving shared goals, both in terms of financial incentives and by favouring good suppliers in subsequent sourcing decisions. The top sourcing leaders form true long-term partnerships with providers who consistently do what it takes to get the job done. Why should a supplier go an extra yard, let alone mile, if they are out of the door within two years and then treated just the same as all the other bidders when the contract is rebid? Why would you invest in training or innovation with such a short horizon?
· For software, competition pushes prices up, not down. Software companies main cost is selling, not development. That’s why they can give 70%, 80% even 90% discounts for large deals and still make more money than selling the same quantity at list price via hundreds of separate sales cycles. Software is about scale, so bigger is usually better. The Technoligarchs's dominance comes from their products' excellence, not by some form of cheating. You can't avoid them, so you should learn to live with them. The way to minimize cost is to make publishers compete for one enterprise-wide sole source contract, not to fritter your volume away across multiple products in one space. Use different providers for different software categories, not within them.
· If you think software is expensive you should see the cost of people. For example, the UK government apparently spent £200 million on Microsoft Office over the last three years. That sounds a huge amount, but it must represent nearly 2 million copies if we estimate a cost of around £40 per person per year. You might be able to save that £40 by switching to Open Office, but each person only has to waste a couple of hours each month struggling with a weaker product or trying to fix what his colleague has done to his formatting and macros, and you’ve wasted 10X what you have saved.
Bottom line: Politicians should empower their public sector procurement teams to use industry best practices for technology sourcing and stop forcing them to use open tender approaches when they aren’t appropriate for the category or project being sourced. They should also focus their transformation initiatives on delivering better project outcomes, and obsess less on minimizing costs.
What do you think? Are you a public sector sourcing professional who is frustrated with the constraints that someone has forced upon you? If you are a service provider, do you think edicts such as Mr. Maude's will help you deliver a better service, or be an obstacle?