Is IT Sourcing Getting Less Strategic?

Recent findings from McKinsey’s annual global survey into IT strategy and spending, conducted in October this year, made me stop and think. These concerned IT executives’ own view of the strategic sourcing effectiveness of their IT organizations. Most respondents — two thirds of the sample — rated their strategic sourcing approach as effective. But this endorsement looks less impressive next to the 2008 findings. In 2008, 35% considered their strategic sourcing approach extremely effective, but only 30% agreed this time. Those who felt the sourcing approach was only slightly or not at all effective jumped from 23% to 32% of the respondents. That’s quite a negative shift.

I don’t for a moment believe that these changed sentiments reflect an abrupt decline in real sourcing effectiveness. Instead, I think the economic context provides the explanation. Forrester’s annual Enterprise IT Services Survey, conducted in North America and Western Europe during April/May 2009, bears this out:

  • IT still has its mind fixed on cost cutting. The Forrester survey showed that many firms’ IT budgets were still on the decline. Fully 56% of respondents expected their firms’ IT budgets to decline by 5% or more over the next 12 month period. More than a fifth of the respondents were expecting a cut of 10% or more.
  • Sourcing dances to the same cost-cutting tune. In IT services, for example, the most often mentioned sourcing initiative (mentioned by almost 80% of respondents), was to renegotiate rates with existing providers. By contrast, no more than half of the respondents mentioned any other single area for services sourcing initiatives. Although most respondents expected rates paid to service providers to remain stable overall, many expected substantial reductions to be achieved with particular providers — 42% were expecting a 5% or greater reduction in rates paid to contractors, and 36% expected similar reductions in rates paid to IT consultants.

Sourcing has been forced to put cost reduction front and center, ahead of more strategic issues aligned to business growth. As a result, some sourcing execs — and some among their IT colleagues — may well feel that IT sourcing has lost strategic focus, as reflected in the McKinsey survey. But growth will return sooner or later, as the end of recession in most major economies testifies.

In my recent research, I’ve laid out some ideas for sourcing professionals — particularly senior execs — about how sourcing strategy needs to adapt to the renewed business focus on growth that will assert itself as the upturn strengthens. If you have strong opinions on these issues, or on my ideas in particular, then I’d love to hear from you.

Andrew Parker, Vice President and Principal Analyst
aparker@forrester.nl

Comments

re: Is IT Sourcing Getting Less Strategic?

I find the McKinsey survey results a bit ironic. If corporate America is spending less on strategic initiatives as a whole, wouldn't it stand to reason there is less involvement or opportunity by IT Sourcing professionals to engage in strategic sourcing?The correlation is, the focus has shifted to driving down existing spending, BECAUSE of the economic climate. I find it disingenuious more Executives wouldn't appreciate the value in cost reduction measures as adding value to sourcing's STRATEGIC effectiveness.

re: Is IT Sourcing Getting Less Strategic?

CarolfromOmaha is quite right -- when times are as tough as they've been of late, cost reduction is absolutely a strategic contribution from the sourcing group.I'm sure the vast majority of IT and IT sourcing execs recognise that reality. It could be that those in Forrester's survey who see sourcing's strategic impact declining are lucky enough to work in organisations which are already beginning to see renewed top line growth -- or perhaps they feel that their companies have over-reacted, and pushed the lever too far across to cost savings?One thing's for sure, the cost saving imperative for sourcing teams certainly isn't going to go away!