The evolution of enterprise IT sourcing is an interesting one to chart over the decades. Twenty years ago or so, the procurement of enterprise IT was largely handled by the organization’s IT department. Not yet a distinct category of sourcing expertise, IT was believed to be too complex, too technical, and too important to be under the purview of procurement. As the amount of enterprise spend on IT grew, early adopters of a dedicated IT sourcing function recognized that IT buying needed more governance and a more strategic approach.
As more companies developed IT sourcing teams, the benefits became clear. IT sourcing practitioners combined functional expertise in enterprise technology with the discipline of proven procurement tactics like strategic sourcing and demand management, volume consolidation, and vendor negotiation playbooks.
Today’s IT sourcing practitioners are integral to the success of business-critical IT initiatives. And they often carry a heavy burden. Balancing business requirements with the need to reduce the total costs of IT purchases and renewals can be time-consuming. There are varying sourcing models to consider. The volume and scope of IT purchases has exploded. Today’s IT sourcing teams are strategic, empowered, and hungrier than ever for market intelligence and ways to accelerate the procurement process without overspending.
In this article, we’ll explore different IT sourcing models and ways to achieve IT procurement excellence.
Contents list
- What is IT Sourcing
- The Role of IT Sourcing in Modern Enterprises
- Types of IT Sourcing Models
- Current Challenges in the IT Sourcing Landscape
- Tips for Achieving Enterprise IT Sourcing Excellence
What is IT Sourcing
At a fundamental level, IT sourcing is the procurement of IT products and services from third-party suppliers. It includes the hardware, software, cloud services, and managed services needed to operate the business effectively and efficiently.
As the role of IT sourcing has evolved, so has its core objectives. World-class IT procurement teams strive to achieve the following:
- Cost Efficiency: Achieving the best value for money, including minimizing the total cost of ownership for IT investments.
- Quality Assurance: Ensuring that IT products and services meet the required standards for reliability, scalability, and performance.
- Risk Management: Identifying and mitigating risks related to cybersecurity, compliance, vendor stability, and operational disruptions.
- Strategic Alignment: Aligning IT procurement with the organization’s broader business goals and strategic objectives.
- Vendor Management: Establishing and maintaining strong relationships with vendors for favorable terms, effective contract management, and access to innovation.
The Role of IT Sourcing in Modern Enterprises
IT sourcing professionals can expect to be busier than ever over the next few years. Gartner projects that IT spending will grow another 8% to $5.1 trillion in 2024, with software, IT services, and public cloud services leading the way. Enterprises are expected to start investing in AI in earnest in 2025 which will amplify both spend and IT procurement workloads.
As explained earlier, IT sourcing’s role in the modern enterprise is invaluable and critical. IT sourcing helps orchestrate tech-driven capabilities that allow the business to adapt to accelerated development cycles, changing economic conditions and customer behaviors, and hyper-competitive marketplaces. Today’s IT sourcing teams must be agile, responsive, and strategic. This will be particularly important over the next 24 months as CIOs reprioritize new projects and initiatives. Many of the projects deferred in 2023 will come online in 2024.
As IT spending continues to grow, it is crucial that IT sourcing stays focused on delivering both hard-dollar and soft-dollar savings with key tech vendors. One part of this is choosing the right sourcing model, which can provide significant benefits in addition to cost reduction, including:
- Access to innovative solutions
- Efficiency and productivity improvements
- Scalable, flexible products
- Filling in technical gaps
- Faster time-to-market
Types of IT Sourcing Models
There are multiple types of enterprise IT sourcing models to consider. Typical options include:
In-House (Insourcing)
This model involves relying on internal resources and employees to manage and execute IT functions. It provides maximum control and integration with the business but requires significant investment in skills and infrastructure.
Outsourcing
In this model, an external provider is contracted to manage and deliver IT services. This can be more cost-effective and allows access to specialized skills and technologies. It includes several sub-types:
- Offshoring: Outsourcing IT services to a provider in a different country, often for cost savings.
- Nearshoring: Outsourcing to a provider in a nearby country, often to benefit from cultural or time zone similarities.
- Onshoring: Outsourcing within the same country, which can offer benefits like easier collaboration and legal simplicity.
Cloud Computing
Utilizing cloud services for IT needs, such as storage, computing power, or specific applications. This can offer scalability, flexibility, and cost-effectiveness, with models like Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS).
Hybrid Model
Combining different sourcing models to create a customized approach. For example, a company might use in-house resources for core IT functions while outsourcing or using cloud services for less critical operations.
Multisourcing
This involves using multiple vendors to achieve the best possible service in different areas. It can provide a balance of cost, quality, and risk management but requires effective coordination and management.
Managed Services
Hiring an external provider to manage and maintain IT services. Unlike traditional outsourcing, managed services often involve a more collaborative and long-term partnership.
Each of the models outlined above has its own advantages and challenges, and the choice often depends on factors like cost, control, expertise, and the specific needs of the organization.
Current Challenges in the IT Sourcing Landscape
The IT sourcing landscape comes with some key challenges, including complex supplier relationships, supply chain disruptions, and inflexible contracts.
Key Elements of a Strong IT Sourcing Strategy
A strong strategy aligns business goals and objectives, evaluating both internal and external capabilities to make more informed decisions. IT sourcing should consider the total cost of ownership, scalability needs, exit strategy, security and compliance, and relationship governance. It requires an ongoing risk assessment and risk mitigation strategy.
Vendor and Solution Selection
IT sourcing requires evaluating vendors and choosing the best solutions at optimal pricing. This can be extremely challenging, especially for enterprise-level companies who may not have deep experience with pricing models and options.
Vendor vetting and selection can also be extremely time-consuming. IT sourcing teams need to perform due diligence, develop detailed requirement lists, manage RFPs, and negotiate contracts.
Contract and Price Negotiation
Well-defined contracts are key to securing a world-class deal outcome that protects budget, mitigates risk, and allows for flexibility. Many IT buyers, however, do not have any way of knowing what constitutes a best-case scenario for contracts. Without accurate and up-to-date information on contract structures and current pricing, it’s easy to get a less-than-optimal deal. For most enterprise-scale IT purchases and renewals, there is a long list of contractual business terms that need to be optimized. Examples include:
- Price protections for current and future-state requirements (e.g. licenses, usage, etc.)
- Service levels, such as uptime, response times, issue resolution commitments
- Renewal and termination provisions
- Performance incentives
- Audit-related clauses and processes
Do you know how different vendors define all these areas and where they are willing to negotiate on pricing and terms? For most companies, the answer is no.
Tips for Achieving Enterprise IT Sourcing Excellence
You can overcome these IT sourcing challenges by employing a few best practices.
IT Price Benchmarking
Conduct regular and ongoing price benchmarking for new purchases and renewals. This will help you determine if your deal pricing is within fair market value range – and, if not, determine appropriate pricing targets. NPI’s research indicates enterprises overpay for more than 85% of their IT purchases and renewals.
License Optimization
Optimize software licenses across your largest software estates (e.g. Microsoft, Oracle, Salesforce, SAP, etc.). This will ensure you’re paying for only what you need and that you are choosing license options that best meet your actual usage requirements. NPI recommends regular self-auditing of license usage to eliminate unneeded or unused licenses.
Optimizing Often Overlooked Terms
Look beyond technical requirements and price to negotiate contract terms that benefit your business and mitigate risks. For example, what options do you have to protect the IT budget amid economic uncertainty? Where can you increase flexibility?
Strategic Management of Software Renewals
Software renewals require a strategic approach to maximize pricing. With current intel on vendor pricing and negotiation behavior, you can negotiate a world-class deal for each software renewal.
Utilizing Outside Pricing and Licensing Experts
It’s impossible for IT sourcing teams to be experts on every vendor. External pricing and licensing experts like NPI give you access to vendor-specific subject matter experts that de-risk your IT investments with four key strategies:
- Validation: Objectively determine where you have a best-in-class offer
- Negotiation: Provide you with vendor-specific pricing intelligence
- Optimize: Define licensing and subscription terms that best fit your business
- Align: Get the entire buying team on the same page with shared outcomes
NPI can help you fill in knowledge and experience gaps within your IT sourcing organization, and arm you with the pricing, licensing, and negotiation intel you need to make best-in-class purchases every time.
Contact NPI today to learn how we can turbocharge your IT sourcing operations.
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