17 February 2011 | Simon Scarrot

A best-practice model for IT procurement allows for a degree of market testing without the burden of running a full competitive tender process, says Simon Scarrott.

Buyers of IT services are under increased pressure to cut costs. For many procurement teams, this translates into a requirement for a competitive tender process. Market-testing through a competitive tender sounds right in principle, but in practice the process can have significant costs. In our own analysis of IT procurement cycles, we have seen re-bid processes costing up to £4 million and taking 18 months or more to complete. Analysis of re-tender exercises in the UK public sector alone suggests that the cost of internal work and fees for external advisers will run to an average of £250,000 in each deal, rising to £1.5 million for deals worth over £50 million a year.

With these figures in mind, a best-practice model for the cost-effective procurement of IT services is emerging, which ensures a degree of robust market testing yet avoids the burdens of a full competitive tender.

As a first step, buyers need a precise understanding of their service requirements. In the IT sector, the accuracy with which buyers define requirements significantly impacts the final cost paid for a bundle of services.

For example, if you need 5,000 desktop workstations to run a customer service application, defining need in those terms rather than the make of PC, size of memory and other technical specifications can lead to significant savings in a re-tender. By contrast, if the specialised nature of your requirements needs a tailored service, the best approach may be a cost-plus approach to service delivery.

Once a precise schedule of requirements has been defined, the next step is to undertake an indicative market test of the current pricing. This uses proprietary databases of the latest market rates for a comparable bundle of services to those on the schedule in order to judge competitiveness.
The resulting figures are often a surprise to the line managers, procurement specialists and finance managers who review them. For instance, finance managers may issue an edict for a 15 per cent cut in costs paid to all external suppliers. The market testing exercise calibrates the existing price against the target price and confirms if these savings expectations are realistic. In other words, the benchmark from the market test confirms if a 15 per cent cut is too demanding or not challenging enough.

With this swift and cost-efficient review complete, managers can choose the next step in a way which will optimise the return on their efforts. There is little point undertaking a complex and costly tender exercise when the benefits on offer are small.

By considering the nature of requirements alongside the indicative market test, the group charged with the procurement can make an informed decision as to which of three approaches are most likely to deliver best value:

• Open competitive tender
• Limited competitive tender
• Negotiate with incumbent.

By aligning process costs with benefits, a buying team can choose a rapid, low-cost process to address situations where the opportunities for savings are small, while adopting a more expansive approach where savings opportunities look substantial.

Key points

• Buyers need to establish a precise definition of terms
  
• The next step is to test current pricing in the market
• Then the most appropriate tender process approach can be selected