A critical consequence of software’s rising importance in hardware-focused sectors is that manufacturers’ spend on software is growing fast. In the automotive sector alone, software and electronics expenditures are expected to almost double in ten years, from $238 billion in 2020 to $469 billion by 2030.
This surge is largely being driven by improvements in software performance that create significant sources of competitive differentiation, visible in features such as driver-assistance functions. 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.
However, software sourcing requires critical investments in capabilities and technologies, as well as significant financial resources. Those players that can procure software and related services at minimum cost and risk have a distinct competitive advantage.
The limits of analog procurement in the digital world
Traditional procurement methods for bespoke software and processes have proven to be inadequate, for several reasons. Most important: procurement specialists often lack access to the expert engineering knowledge and “benchmarkable” facts that drive the true cost of software development. These gaps inevitably hamper procurement’s ability to evaluate whether the proposed cost of new software initiatives is too high (or too unrealistically low).
Siloed procurement functions exacerbate the problem, preventing the flow of information needed for thorough assessment and ranking of supplier performance. That, in turn, reduces 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 organizations to protracted and effort-intensive negotiations, and cause increased exposure to excess cost and schedule risk.
In addition to these internal challenges, the dynamics of the software industry create barriers to effective software procurement. For example, the high lock-in effect associated with bespoke software makes switching suppliers or software especially challenging and costly. Too often, companies end up outsourcing business-critical expertise to just one supplier or find that proprietary software from a specialist vendor seriously constrains future software architecture and vendor choices.
The impact of software-procurement excellence
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 (Exhibit 1). The highest performing sector—pharmaceuticals and healthcare—shows a significantly better cost performance than general manufacturing industries and the financial-services sector, where costs are significantly greater. The question then becomes “How can companies improve their software-procurement performance and reap the same reward?”
Measuring procurement excellence in software
To identify the best practices leading to software-procurement excellence and investigate the state of the art in software procurement, we collaborated with the University of Mannheim on a global survey of procurement practices, interviewing more than 150 companies worldwide with revenues greater than $1 billion, spread across more than 20 industries. The survey assessed each company across three main areas of software-procurement excellence:
- Process: how the process of buying bespoke software is managed
- Organization: which departments are involved in the procurement process, and how they organize to enable smooth and rapid acquisition of software
- Capabilities: the skills and tools applied to execute the software-procurement process
The three areas were further broken down into eight dimensions, such as software capabilities, market-discovery practices, and the hierarchical role of the procurement function, and more than 30 subdimensions. Together, these data points revealed procurement functions’ true competencies with regard to software procurement.
Finding the path to excellence
One clear finding from this analysis is that there is no one silver bullet. Instead, top performers demonstrated a multidisciplinary, holistic approach that applies best-in-class behaviors across most dimensions: mindsets, tools, supplier interactions, and procurement’s organizational position.
Nevertheless, a closer look at top performers reveals that while scoring highly on all dimensions, these organizations demonstrate distinctive skills in the following areas: internal collaboration, use of data and cost-modeling tools, empowerment of procurement teams, and understanding of software architectures and market conditions.
Tighter collaboration. In other words, high-performing software-procurement teams view their work as a team sport and involve a wide range of internal experts—especially software architects. They leave no place for siloed thinking. This transformation helps 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.
Better use of tools. Like all good sports teams, statistics have the power to turn performance around. Thanks to rapid advances in data and analytics technologies, procurement teams now have access to large volumes of software-project data. With the help of advanced analytics, they can now turn these data into powerful insights, at scale and at speed, without relying only on the capabilities of individual buyers.
A chief advantage of specialist procurement software is that it exposes opportunities for improvement. Procurement can benchmark proposals, simulate true costs to provide software services, hold vendors accountable, and implement supplier-development programs to improve productivity—all while reducing the effort and time required to close deals. The resulting fact-based approach combining processes, tools, and data has the power to enhance transparency and accountability, and to reduce negotiation effort.
Empowered organizations. High-performing procurement teams are empowered not just with data and tools but also organizationally: they do not function only as a back-office service. Teams that are centralized as a core procurement competence have a critical role in driving the process, and therefore the outcomes. They develop strong interorganizational and supplier relationships and assume a leadership role when establishing access to externally sourced software technologies and services (Exhibit 2). We also see that procurement centralization often includes rare but essential software literacy, either structurally or virtually, by effectively engaging their own internal software-development teams to enhance their procurement excellence.
Technical and market knowledge. High-performing teams also develop and maintain knowledge of the software market and its suppliers. 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.
Perception is not always reality
The results of this study also revealed a surprising barrier that software-procurement organizations face: themselves. The data reveal that compared with the rest of the procurement organization, chief procurement officers (CPOs) have a significantly more positive opinion of internal-procurement capabilities (Exhibit 3). The resulting rose-tinted view can blind senior executives to the need for investments and changes that would improve the team’s effectiveness. Often, it takes an independent and objective assessment or benchmark of capabilities to stimulate adoption of what others have demonstrated are the best practices.
Procurement excellence across sectors
While there were naturally differences in levels of maturity and excellence between companies within industries, some general themes became apparent as well. The pharma and healthcare industries, on average, lead the way in software-procurement excellence, exhibiting high performance in negotiation strategy, commercial flexibility, and capability building. At the other end of the scale, the manufacturing and automotive industries can benefit most by adopting best practices, especially in refining supplier strategy and incorporating learning from past contracts when establishing new initiatives. Also noteworthy was how industries characterized by industrial and manufacturing processes, such as automotive and materials processing, significantly lag behind industries with high levels of software exposure and adoption, such as media, retail, and logistics (Exhibit 4).
Although the study exposed tendencies for some industries to adopt (and benefit from) more mature software-procurement practices, even the top players showed room to improve by focusing on certain subdimensions. For example, the pharmaceutical and healthcare industry—a top performer across several dimensions of excellence—could still derive additional value by achieving higher levels of consistency.
In the fast-paced, rapidly expanding world of software, ensuring low-risk, cost-effective access to the best enabling technology and services continues to be a challenge across industries. Companies that underinvest in state-of-the-art procurement processes, tools, and expertise risk missing out on the bottom-line value that industry leaders have demonstrated is possible. And in a range of sectors around the world, organizations have shown improvements in performance per unit of cost of 10, 20, or even 30 percent—generating real competitive advantage as the importance of software keeps growing.