There isn’t an IT sourcing and vendor management (SVM) client that I’ve spoken with in the past seven years – Forrester explicitly started writing for SVM professionals in 2006 – that hasn’t mentioned gaining more influence with executives as a key priority for their teams. A key reason for this lack of stature with the business, and often the resulting lack of promotion opportunity, is that IT's SVM staff are seen as focusing on an “indirect” spend category; they’re not responsible for buying/managing relationships for the core commodities that are used to make their company’s products (“direct” spend). However, that is about to change, as software and application development services are becoming direct spend for many companies.
Until recently, most companies made physical products by purchasing raw materials and building the products in factories. The factory operations were the heart of the business, supported by the sourcing of the raw materials needed to make the products. But more and more, physical products depend on software and other technologies to be viable. And while we traditionally thought of only high-tech companies as making software-dependent products, nontechnology companies of all kinds – retailers, banks, automotive companies, and others – rely on software as the key interface of their products. For example:
- Technology defines how customers feel about their banks. Checking accounts are commodity products, where most customers interact with the product online – either through an ATM, a web browser, or a mobile app. The effectiveness of a bank’s apps will mean the difference between satisfied customers and those who choose to take their money elsewhere.
- Software is becoming a differentiator when buying cars. The software in cars that allows customers to see into what were previously considered blind spots or call remote help desks from their dashboards marks a tremendous departure from the days when cars’ primary differentiators were horsepower and gas mileage. How much has software become part of new cars? A recent Forbes article highlighted how hackers controlled a Ford Escape and killed the brake system while the author drove the car (slowly).
Forrester calls these software-dependent firms “software-is-the-brand” companies. My colleagues first started writing about this concept in 2011. But we’re hitting an inflection point on broad adoption of the idea. Software-is-the-brand companies are beginning to understand that technology is their supply chain – technology is becoming a “raw material” that allows today’s products to be built.
Why does this matter? Because people who handle direct spend are considered critical to the business. Their opinions matter because great product designs get built only if the company can source the right materials. And company strategies succeed or fail based on how effectively sourcing executes on those raw materials purchases. (Just consider how a spike in the price of steel affects the ROI of a new car launch).
Where does this move to software-dependent products leave us? In a business environment in which sourcing technology products and services – and managing the relationships with those key suppliers – is becoming a critical and integrated part of the business.
So what should you do if you want SVM to be the business instead of aligned to it?
- Educate stakeholders on how technology operations will become the supply chain. As software becomes the product (or customers’ experience of the product), then technology operations become synonymous with product operations. Third-party software and services companies then provide the direct materials needed to make the products.
- Talk about technology as direct spend. This means forgetting feature/function discussions with internal stakeholders and replacing them with conversations about how the technology will or won’t help them get the next product iteration out the door.
- Connect with product development and manufacturing teams. Many SVM professionals are already seeing an increase in requests for IT sourcing help from non-IT stakeholders. Today, it’s primarily from marketing teams, but product development groups are starting to call, too. Be more aggressive in reaching out to the people responsible for new products to talk about how you can help them with the technology components of their products – whether it’s helping them find a mobile app development firm to build their new product interface or researching innovative software companies that can become the foundation for some new software-enabled enhancements to the next product version.
- Consider how traditional vendor relationships need to evolve. Gone are the days of wholesale outsourcing of key apps. Today’s agile environments require integrated client/supplier teams that work iteratively. That move away from traditional “passing back and forth” models means that vendor managers need to re-evaluate their governance.
- Move to a software-is-the-brand company –or at least to application services sourcing. No matter how much value you add to a more traditional firm with IT sourcing, you’re still likely to be viewed as an enabling function. At a software-is-the-brand company, you become part of the company’s product operations – automatically increasing your organizational importance. Even if you don’t change companies, you should consider moving into services sourcing. It’s likely that people who source or manage application development and product development services are most likely to benefit from technology’s shift to a direct spend category.
How quickly IT SVM professionals can make the shift from indirect spend to direct spend (i.e., from important to mission-critical) depends on how well they can communicate their role in the shift to “software is the brand.” Smart CPOs and other SVM executives will make this communication a key priority for the rest of this year – and their top priority for 2014.