Procurement is broken. Here's how companies can avoid the biggest blunders.

Josh Oakhurst, Chief Strategy Officer, Skookum Digital Works

February 18, 2014

5 Min Read

Stagnant procurement processes often kill innovation. As more companies look to build software instead of buy it off the shelf, the first process that requires improvement is the one where the contract gets signed.

At Skookum Digital Works, our 55-person shop in Charlotte provides tech investment strategy advice and also builds hardware and software from scratch, so we live this. To avoid irrational fears, policy-driven blinders, and downright rule-bound stupidity during the  procurement process for innovative technology, avoid these four mistakes.

Mistake No. 1: You think you're buying a product
You're not. You're going on a journey. Custom software development is not something you should purchase like paper clips. Procurement departments are wired to haggle over incremental per-piece pricing, volume numbers, and delivery dates.

Pre-packaged technology providers have "inventory" sitting on the self; they sell what's in the box. In contrast, custom technology consultants take pains to map out investment options and craft custom software executions. When business units express the desire to go on a technological journey, procurement should help them pick a tour guide, not insist on cross-shopping hotels. Projects slow down or can implode altogether when procurement gets this wrong.

[Considering custom software? Don't miss this post from Coverlet Meshing: Build Vs. Buy: A Dangerous Lie.]

Custom software service companies exist because someone decided what's in the box won't work. For a custom execution, the process is the product.

Mistake No. 2: You require the contract have a hard delivery deadline
Custom technology engagements are best controlled by budget and ambition, not deadline. The goal of a tailored software creation process is to create working software as soon as possible. After all, code is a liability; you want the least code possible. Features determine how much code will be written, and at the moment of contract signing, the features you think you'll include are always dubious.

What you will want in the contract is a nod toward a delivery date for a minimum viable product, and a proposed sprint schedule. But it's folly to assume anyone knows the final end date of your journey at the time of contract signing.

Mistake No. 3: You view custom software as a dollar-per-hour commodity
Developer cost per hour is a terrible way to look at a custom software project. Is the value of the Empire State Building a function of the price of steel and the labor hours that went into it?

Procurement departments run straight into this trap because developer cost per hour, like the price of steel, can be easily measured. If custom software development were merely a function of developer time, then hiring an array of the cheapest offshore coders would get the job done. You're paying for business technologists who can implement or invent technology that does what you asked for -- make your business faster, more efficient, more profitable, more robust.

Mistake No. 4: You assume the standard software contract deductions apply
Because out-of-the-box software contracts have been negotiated with standard deductions, buyers often assume custom software is also highly negotiable. But the logic of volume pricing doesn't apply to creation-from-scratch. Always fighting for a discount off sticker price is not only obnoxious, it's myopic. (And, in some cases, downright stupid.)

Procurement helps its business units succeed by doing a complete cost-benefit analysis. Often, the best way to measure the value of custom software development is to stack it against the cost of doing nothing.

Simply, you can't get a unique act of creation wholesale.

Best custom software procurement practices
So how can procurement pros know they're getting the right price, and not getting taking to the cleaners, on custom software procurement? Here are some guidelines:

  • Use this value cheat sheet: pre-packaged software = tech to-do list; custom software = tech wish-list. Since there is no rate for technology invention, assess custom software providers based on the business value they created for past clients, not comparatively between off-the-shelf vs. custom options.

  • Factor speed of decision making into how you support your business unit heads and their partnership decisions. Be a speed facilitator, not a speed bump.

  • Treat the hiring of custom technology providers much like hiring management consultants. Both are tasked with (and will be measured by) business-change -- specifically with increased revenues or process automation. So if you’ve ever hired management consultants, you might already have a procurement paradigm for custom software.

  • If you want a markdown, be willing to compensate your technology partner for the increased profits or productivity you receive on the other end.

  • Instead of uniformly and reflexively beating up vendors, find another way to demonstrate procurement performance. On innovative technology contracts, factor in speed of approval, flexibility (novel), problem solving ability, and general helpfulness, as measured by reviews from leaders in the requesting business unit.

Businesses often try custom software when they see a chance -- often fleeting -- to grab new revenue. But the lack of neat edges on the forefront of innovation can cause some real problems for policy-driven departments like procurement.

In short, procurement leaders need to be as innovative as their fast-moving business units require. 

Engage with Oracle president Mark Hurd, NFL CIO Michelle McKenna-Doyle, General Motors CIO Randy Mott, Box founder Aaron Levie, UPMC CIO Dan Drawbaugh, GE Power CIO Jim Fowler, and other leaders of the Digital Business movement at the InformationWeek Conference and Elite 100 Awards Ceremony, to be held in conjunction with Interop in Las Vegas, March 31 to April 1, 2014. See the full agenda here.

About the Author(s)

Josh Oakhurst

Chief Strategy Officer, Skookum Digital Works

Josh Oakhurst is the Chief Strategy Officer at Skookum Digital Works, a growing technology investment and innovation partner hiring NY, SF, and SV refugees since 2005. He's @joshoakhurst on Twitter and 

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