Rapid advances in software performance in procurement are becoming the springboard for product differentiation and faster time to market for businesses with the right procurement skills.
McKinsey & Company, reports in ‘Reaching excellence in software procurement’, the consequence of software’s rising importance in hardware-focused sectors is that manufacturers’ spend on software is growing fast.
By 2030, in the automotive industry, the expenditure on software and electronics is forecast almost double to $469 billion from $238 billion in 2020.
What’s driving the ‘software surge’?
It’s largely being driven by improvements in software performance that create significant sources of competitive differentiation, visible in features such as driver-assistance functions, McKinsey says.
“Increasingly, the factors that matter most to product quality and user experience depend on quality software. That means software sourcing is now a major driver of overall product cost—and of the margins that can be achieved,” said McKinsey.
But to buy the right software requires the right capabilities, adequate resources and technologies.
“Those players that can procure software and related services at minimum cost and risk have a distinct competitive advantage,” McKinsey said.
Many traditional procurement methods for bespoke software and processes are known to out of date for several reasons – knowledge being a primary focus.
“Most important: procurement specialists often lack access to the expert engineering knowledge and “benchmarkable” facts that drive the true cost of software development,” McKinsey said.
“These gaps inevitably hamper procurement’s ability to evaluate whether the proposed cost of new software initiatives is too high (or too unrealistically low).”
There’s also another issue McKinsey say is exacerbating the problem – siloed procurement. This prevents the flow of information needed for thorough assessment and ranking of supplier performance.
This is believed to reduce buyers’ negotiation leverage, leaving vendors unaccountable for delivering competitive productivity levels.
“Overly optimistic commitments are a further symptom, increasing the risk of cost and schedule overruns. Last, poor processes and tools expose organisations to protracted and effort-intensive negotiations, and cause increased exposure to excess cost and schedule risk,” McKinsey said.
Additional to internal challenges, the dynamics of the software industry can create barriers to effective software procurement.
Barriers include:
- the high lock-in effect associated with bespoke software- making it challenging and expensive to change suppliers
- outsourcing business-critical expertise to just one supplier
- proprietary software from a specialist vendor placing constraints on future software architecture and vendor choices.
The commercial benefit of “superior software-procurement skills” is clear from the strong relationship between higher levels of software-procurement excellence and lower per-unit cost of bespoke software, the article states.
“Higher software-procurement excellence correlates with lower software-procurement cost,” McKinsey said.
Four key traits of software procurement excellence
After interviewing more than 150 companies worldwide with revenues greater than $1 billion, spread across more than 20 industries, the following trends below were found in relation to carving out a path to excellence.
Top performers demonstrated a multidisciplinary, holistic approach that applies best-in-class behaviours across mindsets, tools, supplier interactions, and procurement’s organisational position.
1. Tighter collaboration – ‘work is sport’
It was found that high-performing software-procurement teams are in the game of treating their work as a sport. The work involves a wide range of internal experts—especially software architects. The research said there’s no place for siloed thinking, helping software procurement evolve in its role and position as a business partner on software matters, so that teams can exchange and apply the combined software knowledge from both internal stakeholders and external partners to achieve optimum outcomes.
2. Better use of tools – leveraging data and analytics
With rapid advances in data and analytics technologies, procurement teams now have access to large volumes of software-project data.The top companies were found to leverage advanced analytics to turn data into powerful insights, at scale and at speed, without relying only on the capabilities of individual buyers.
Specialist procurement software exposes opportunities for improvement, allowing benchmark proposals, simulating true costs to provide software services, hold vendors accountable, and implement supplier-development programs to improve productivity. “The resulting fact-based approach combining processes, tools, and data has the power to enhance transparency and accountability, and to reduce negotiation effort,” McKinsey say.
3. Empowered organisations breeds high performing teams
The research found high-performing procurement teams are empowered with data and tools and organizationally – they’re not a back-office service.
“Centralised teams as a core procurement competence have a critical role in driving the process, and therefore the outcomes. They develop strong inter-organisational and supplier relationships and assume a leadership role when establishing access to externally sourced software technologies and services,” it said.
Procurement centralisation was discovered to often include essential software literacy, either structurally or virtually, by engaging internal software-development teams to enhance their procurement excellence.
4. Market intelligence – reducing technical risk
Maintaining and growing market knowledge was another hallmark of high-performing teams.
“That enables them to participate early in architecture and supplier selection, guiding early decisions that can increase breadth of choice and reduce business and technical risk,” McKinsey said.
Who is leading the way?
The research noted differences in maturity and excellence between companies within industries, but there were general themes unearthed.
Leading the way, on average, were the pharma and healthcare industries showing high performance in negotiation strategy, commercial flexibility and capability building.
At the lower end, manufacturing and automotive industries were found to have significant work to do “by adopting best practices, especially in refining supplier strategy and incorporating learning from past contracts.”
These industries lag behind industries such as media, retail and logistics which experience high levels of software exposure, it was found.
In closing, the research claims the rapidly-advancing work of software continues to create challenges. It found companies which underinvest in leading procurement processes, expertise and tools are “missing out on bottom-line value”. It claims a range of sectors from across the world have reported improvements in performance per unit of up to 30 per cent generating real competitive advantage.
Read McKinsey’s ‘Reaching excellence in software procurement.’
