Follow the money: Transform your IT supply chain


As I discussed recently, outsourcing is a double-edged sword. While it aims to save you money, it takes as much time to deal with the third-party as it did when you met with your own staff. And more often than not, the initial savings you experience will soon fade away.

Afterall, outsourcing firms are businesses and not charities.

In a recent Advanced Trading article dissecting the best practices around using third-party solutions, the author estimates that 48 percent to 62 percent of total IT expense flows outside firms to vendors. In the end, the IT supply chain and associated contracts determine an organization's technology economics. Throw in a grinding global recession with an anemic (at best) recovery and CIOs must decide whether or not they need to rethink the eternal build vs. buy debate.

As the author writes, "The built-in assumptions underlying these contracts - such as that volumes will grow and unit costs will decline at the rate of current technology advances - were likely sound at the time the deals were done, but are likely not valid in the long-term. And the very nature of many past contracts, with long terms and termination penalties, renders them an impediment for companies that need to transform their technology economies to adapt to the new normal of the financial services sector. As such, organizations trying to move forward are more likely to spend time trying to break old contracts as the vendors attempt to hold on to them rather than being able to work rapidly towards their new operating models."

To avoid the mistakes of the past, CIOs must establish core tenets for how they approach contracts and manage the IT supply chain.

Here's the first step: Follow the Money to Size the External Flows

Follow the Money" is an interesting phrase. It played a major role in the nation's politics in the Watergate era and was cited in the 1975 book, "Crime in Britain": "Always follow the money. Inevitably it will lead to an oak paneled door and behind it will be Mr. Big. It is a tip that has paid off in many cases".

In Technology Economics, this guidance is proving to really pay off - especially in the area of assessing the potential to reshape an organization's technology economics by transforming the operational model of its IT supply chain and contracting foundations

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