Particularly in healthcare, it’s common for supply chain teams to sit on the sidelines while information technology (IT) leaders and teams independently negotiate and manage software, hardware and purchased services contracts. While supply chain has responsibility for all remaining organizational contracting and procurement, getting involved in IT contracts has been elusive to many procurement leaders.
"Evaluating when to purchase new hardware or software is a strategic decision to which supply chain can add value"
The decision to include supply chain has nothing to do with who is a better negotiator but rather how to achieve the best possible outcomes by engaging all your organization’s talent. Open collaboration and sharing of information internally can be leveraged for mutual advantage. The use of multidisciplinary teams can be illustrated by the four legs of a chair representing the business owner, IT, legal and supply chain. Each team member brings a unique and important knowledge set to the discussions.
This article will share some lessons learned and how including your supply chain can help improve procurement and contracting, specifically in negotiations, financial policies and contract management.
Think ahead. It’s easy to get consumed by the challenges of the day, and far too often contract expiration dates sneak up on you and new product needs can’t get done fast enough. Being put in the position of “get it done” rarely results in a great outcome. Supply chain staff members manage contract lifecycles day in and day out. They’re positioned to help you establish procurement timelines and know when to start negotiations and engage with business owners. As the expiration date draws near, the power rapidly shifts to the suppliers.
Have a plan. A plan does not need to be overly complicated but should include a minimum of what is needed, the options, the best way to achieve the desired outcome, the most likely pushback by the supplier, and the most dangerous position you can find yourself. Have a plan for the team to work from as you approach the market or negotiations. Equally important is that all of this must occur early enough to implement effectively.
Know what the business needs. Overbuying is all too common. It is vital that a methodology be used to scrutinize what is needed, that the business has taken the time to evaluate its practices and processes, and you have clearly articulated what each component will accomplish. Evaluating when to purchase new hardware or software is a strategic decision to which supply chain can add value. For example, weighing the costs of support or maintenance on an aging server against investing in a new one (TCO approach). Timing is key to securing the best overall value for your organization and not running into a break or fix scenario in which the supplier has all the leverage.
Define performance requirements. The lack of performance measurements in contracts is far too common and goes beyond the basics of uptime guarantees and initial service response time. Including a clear description of the objectives the software is to accomplish and financial consequences if it does not meet those requirements is critical. It is remarkable how often teams focus on the nuances of terms and conditions that will never get used but gloss over language that will hold the supplier accountable for the very reason you are buying it.
Don’t let maintenance start before implementation. There is probably nothing more frustrating for IT leaders and business owners than paying for something you are not using. Unfortunately, business process changes, conflicting priorities and unexpected delays all can lead to software sitting on the proverbial shelf. The maintenance or subscription costs may include some development and enhancement of the software, but it often does not make business sense to pay for something until you use it.
Watch annual escalators. I am always amazed that hard asset manufacturers can drive down costs more than 5 percent each year of a contract without stifling innovation yet software costs rise annually at alarming rates. This is not sustainable for healthcare, in particular, and will be an area of increased scrutiny for us.
Quote detail. Take the time to educate your team and supplier representatives on the level of detail you expect. This can include line-level detail of hardware, licensing, support, consulting, etc. that can later be used for effective cost accounting by application or even greater detail. This can be especially challenging for value-added resellers that tend to bundle pricing. It all starts with the quote, as this is the basis for effective purchase orders.
Use purchase orders. Partner with your supply chain team to get maximize hardware, software and purchased services on PO. This will accomplish several key business objectives: collect purchase detail into your financial or accounting system; automate management of payments; require invoice errors to follow a dispute process; and in general use all key business controls your auditors expect.
Don’t code invoices. As mentioned under the PO section above, coding of invoices erodes established business controls around procurement. Double payments can occur, invoices can be taken at face value versus validated against the contract, and you will have virtually no purchase detail to perform cost accounting or even a simple purchase history review.
Conduct business reviews. The review should follow a standing agenda that includes transparent discussions on performance against the contract, technical performance, new and sun-setting technologies, product life cycles and a host of other technical areas. Include supply chain in these meetings to assist with documenting contract performance, benchmarking services and supporting business owner feedback.
While not all of these areas may exist in your organization, your supply chain organization would likely welcome the opportunity to discuss how it can help accomplish your objectives. We have certainly benefited by engaging all members of our enterprise team—business owner, IT, legal and supply chain—as a united front with suppliers, resulting in the best possible outcome in a shorter period of time.