Updating IT Procurement For The 2020s

We are now firmly in the 2020s, but IT procurement processes still use the same request for information (RFI), proposal (RFP), and quote (RFQ) processes that were used in the 1980s. TM Forum is an alliance of over 800 companies working together to break down technological barriers that digital service providers and their suppliers face. In a detailed report, they examined how companies, particularly communications service providers (CSPs), are approaching procurement and how we can move those processes into the modern era. The report was broken down into 7 key observations.

Current Procurement Processes

As mobile took off in the 1980s and 1990s, multiple mobile licenses were granted in most countries. From these licenses grew several large operator groups. The need for procurement that crossed international borders and worked with a variety of technologies prompted these companies to create their own procurement organizations. These organizations break their procurement goals down into several categories, such as network, IT, service platforms, etc. This allows individual team members to specialize in the procurement of a given class of goods or services.

Not every CSP is large enough to justify such a granular procurement strategy, so there are companies that do not break the categories of their procurement organization down any further. Still others, such as tier 2 and tier 3 CSPs, can’t justify the cost of a dedicated procurement organization at all. These companies rely on third-party management consultancies.

The typical means of procurement, as mentioned earlier, is the RFP or RFQ. In an age where technology gives us instant gratification for nearly everything, these RFP processes are still painfully slow. In some cases, the process can take up to a month.  Considering the typical procurement organization handles 200 RFPs annually, this represents a significant bottleneck in modern IT procurement. 

How RFPs Work

The procurement process often starts with an RFI. This is a request for information about a new product or service that the company is interested in and which requires the purchase of hardware or software. Many of these requests for information go nowhere, as the company decides not to move forward with a purchase. But when a decision to purchase is made, the next step is to send out an RFP or an RFQ. The process for issuing an RFP can be complicated.

The first step is to create a strategy document. In this document, the IT or network team will explain to all of the stakeholders in the business how the new technology will be used and implemented. The documents tend to be around 30 pages long. Once the strategy document has been approved, the procurement team will issue an RFP to several suppliers. The RFP document is even longer, around 100 pages. This is because the RFP must have a detailed list of requirements that the supplier must confirm they meet.

Because these documents are long, it can take the suppliers a while to respond to them. Suppliers use a team of employees to respond to such requests. At large companies, the teams can have a couple of dozen people and include people with knowledge of all aspects of the product or service. With their combined knowledge, the bid team will work their way through the document and determine if and how they can meet the requirements. This may require the bid team to talk to the requesting CSP for clarification or further questions. It usually takes around a month for the initial response to come in.

The CSP will then short-list their favorite suppliers and the second round of discussions will begin before a final decision is made and the contract is drawn up. Contract negotiations can add an additional 3 to 6 months to the timeframe. 

Why the RFP Process is Broken

The RFP process isn’t working anymore for most people who use it. 81% of vendors say that the process is no longer fit for purpose, and 68% of CSPs say the same thing. In order to fix something, or replace it with something better, you need to know what doesn’t work. Criticisms of the RFP process can be broken down into 4 major complaints:

  1. Length of the process — It takes months to go from sending out RFIs to signing a contract on an RFP. When everything goes smoothly, the process can take up to a year. When complications arise, it can take over two years. This isn’t fast enough for the speed that today’s businesses operate at.
  2. Poor results — Suppliers are compelled to make bids that are normalized to make comparisons between them and other providers easy for the CSP, but this ultimately only adds confusion to the process. When suppliers can’t be as specific and detailed as possible, they end up with a contract that is harder for everyone to understand.
  3. Cost overruns — Sometimes requirements change, and others are just left out of the initial RFP. Whatever the reason, there are often requests to change the contract that ends up making the final costs much higher than planned. 
  4. Distrust between parties — These contract changes and the price negotiations that result from leave both vendors and CSPs feeling as though the other can’t be trusted. 

The Money Wasted on Procurement

Both the CSPs and the vendors have large teams, or entire organizations, dedicated to IT procurement. The process from start to finish can take over a year. In staffing costs alone, the cost of participating in the RFI, RFP, and RFQ processes are staggering. The average vendor estimated those costs to be around 5% of their total revenue. Based on the size of the telco IT procurement business in 2019, that means suppliers are spending around $750 million a year participating in the process.

Staffing costs for the procurement teams of CSPs are estimated to be around $30 million a year, but that does not factor in the cost of bad deals. Based on the rate of failed projects and the fact that CSPs are expected to accurately estimate their requirements several years in advance, there is a compelling reason to believe that lost revenue and bad deals hit CSPs just as hard as the $750 million hit to suppliers.

Procurement and Innovation

Innovation is what keeps businesses moving forward, but the current method of IT procurement slows down the process in a number of key ways. Innovation is just as likely to come from a small startup as it is from a larger vendor, but those small startups often lack the resources to compete in the current procurement process. Established vendors have an existing relationship with the CSPs and are able to use that history to create bids that are more likely to win contracts. As a result, many CSPs have begun purchasing smaller companies whose products or services they think may be able to help their business.

Agile and DevOps methodologies are the wave of the future in software development, and many CSPs have switched to these processes for new software. There is still heavy reliance on legacy software, however. Legacy software presents a challenge for Agile and DevOps work because of its heavy reliance on third-party vendors.

Updating Procurement

With procurement teams and suppliers both in agreement that the old way of doing things is a hindrance, There is a search in the industry for a procurement methodology to replace RFPs. The TM Forum report focused on a few areas where the current process can be improved:

  1. Proofs of Concept — Indian telecoms operator Reliance Jio has already replaced the typical RFP process with one based on proofs of concept. After an initial discussion with a larger number of suppliers, their field is narrowed down and they begin field trials with those remaining. The telecom industry as a whole has high hopes for POC based procurement, but is looking for a way to make them a more streamlined part of the process.
  2. Full Embrace of Agile Methodology — Moving procurement to an agile methodology requires one of two options. The first is for the CSP to break the project down into smaller projects that can be more readily adapted to Agile. The second is to contract with a single vendor who will work with the company to deliver the product in an agile way. 
  3. Decentralization — Right now, the procurement teams handle everything. The process could learn from the mentality behind DevOps in software development, where everyone gets involved. Bringing the tech team in to have discussions with vendors and allowing the procurement team to focus on making the deals could streamline the process of hashing out the requirements.
  4. Frame Agreements — As mentioned earlier, a great source of problems with the current RFP process is cost overruns and the distrust that arises because of them. Frame agreements agree that the parties have not come to a full agreement about every aspect of their relationship, but have agreed on enough to move forward. They establish terms that govern how contracts will be handled in the future.

A New RFP: Request for Partner

TM Forum took what they learned while researching the previous sections and used that knowledge to come up with a proposal for a newer, more agile way of approaching IT procurement. This new process, which they call ‘request for partner’, recognizes that the interests of both parties are best served by a partnership model. Their process consists of 5 steps:

  1. Scouting — Rather than passively managing existing suppliers, procurement teams should be actively on the lookout for new technologies that may help their business innovate. In particular, they should make an effort to reach out to smaller companies that don’t have the resources to come to them.
  2. The Ambition Statement — This document replaces the tedious and highly specific RFP proposal with a short document that outlines what the technology team needs from a business and use-case perspective. It lets the suppliers take a more active role in how those goals are realized instead of adhering to a strict set of requirements.
  3. Prospect Invitations — Three to five vendors should then be chosen to present a proof of concept to demonstrate who they will help the CSP achieve its stated ambition. The proof of concept will revolve around sprints so the two companies can see how well their agile workflows play together.
  4. Bid Solicitation — The CSP picks several of their favorite potential vendors and creates a competitive bid document for them to create a bid around. Again, this document should be much shorter than a traditional RFP and should be based around the proof of concept that was shown by each specific vendor.
  5. Contract Agreement – Finally, the winner is chosen and the contract is awarded. 

TM Forum estimates that the entire process will take 2-3 months. They recommend that the procurement team provide guidance and expertise rather than being tasks to handle the process end-to-end. This allows the technology team and other departments to have a role in the procurement process.

 

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