Digging Into IBM's Procurement Outsourcing Strategy and Offering (Part 3)

Continuing on in our analysis of IBM's procurement outsourcing capabilities, I thought it would be prudent to start by sharing some additional thoughts from Bill Schaefer about how IBM approaches customer situations to maximize the potential value they can bring to a client (not to mention the fees they can generate from savings). From an original engagement perspective, I was surprised to learn that most of IBM's procurement outsourcing deals start as targeted discussions rather than as part of broader outsourcing sourcing. To this end, Bill told me that "The majority of our deals start as a procurement discussion -- only a small percentage of clients are interested in multi-tower deals". However, multi-tower outsourcing relationships "are not going away". It's just that they are representative of only a minority of cases.

And there's a large enough sample size at IBM today to prove this out. Today, IBM's procurement outsourcing group works with over 30 clients, over 5 of which it added in 2009 (including a "couple in retail"). Bill believes that much of this growth can be attributed to companies separating out core from non-core procurement processes and expertise. In other words, companies are keeping core direct materials sourcing in-house and are looking to partners to help provide competencies and savings around indirect spend. One case in point proves out how IBM is approaching potential customers by using the indirect strategic sourcing message.

Bill noted "we signed a deal a couple of months ago with a financial services company. It was strategic sourcing only. A single category -- IT spend. It was a situation where they had significant IT spend that they were not managing well. They had issues with licenses, etc." IBM was able to get in the door because of their specific experience taking on the entire sourcing responsibility for IT -- managing the entire lifecycle of the sourcing processes included but not limited to upfront negotiation and contracting.

But in situations like this, where IBM is pricing on a value-basis (e.g., sharing in the savings), how do they determine the baseline price? In many areas of spend such as IT, no baseline exists, because models and SKUs come and go. The next time a company needs to replace or upgrade a server or software packaging, for example, the previous pricing is no longer relevant.

So to set a baseline price to determine savings levels (and IBM's fees), IBM's procurement outsourcing group often brings IBM consulting in to help establish the baseline. This effort can sometimes serve as an entre for a broader consulting relationship as well. For example, while the procurement outsourcing group "may be doing managed services for indirect" there might be "an opportunity on the direct side [e.g., supply chain or make/buy] or a systems implementation" for the IBM consulting organization. All in all, it seems like a rather symbiotic relationship even though the groups manage to a separate P&L (as is the case with Accenture's consulting and procurement outsourcing groups as well).

Stay tuned for a final post in this series when we examine what IBM's procurement outsourcing strategy means for the overall market, not to mention IBM's competitors.

- Jason Busch

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