Procurement focus on cost reduction stunts innovation, warns Ivalua report
With a new report from Ivalua revealing that more than two thirds of telecoms organisations say innovation is being blocked because of their focus on cost reduction, George Malim asks the company’s chief marketing officer, Alex Saric, how communications service providers’ (CSPs) approaches to procurement are changing as the service portfolio and competitive landscape transforms.
The research, conducted by Vanson Bourne on behalf of Ivalua collated responses from 200 UK supply chain and procurement professionals across the manufacturing, retail and finance sector – 40 of these respondents were from the UK telecoms sector. Further findings include that nearly two thirds (63%) view supplier relationships as transactional. What’s more, 58% of operators still place cost savings above innovation. This has to change if telcos want to stay competitive and avoid putting supplier, Saric says.
George Malim: The report found that 70% of telecoms organisations say innovation is being impeded by the focus on cost reduction. Why is cost control such a focus for operators?
Alex Saric: In general, if you look at procurement functions and supply chains, telcos are not among the leaders when it comes to cultural change. Therefore there’s a lot of struggle involved for them to go beyond cost [in the procurement process], especially in terms of understanding what their suppliers are capable of and understanding what risks are involved.
GM: The research also uncovered that 53% of respondents say the number of products and services launched over the last 12 months increased which seems to illustrate that innovation is happening in spite of the cost priority. Can this innovation be sustained without reprioritising innovation?
AS: No, I don’t think it can but there is a dichotomy. Customers expect to access greater innovation and there is market pressure because of that. However, just because new services and products are being launched it doesn’t mean that successful products are being launched. That’s an important point and as the business becomes more and more outsourced and dependent on supplier relationships companies with more scalable models that understand the supply chain are doing better.
GM: How are operators’ attitudes to suppliers changing? Are they embracing the more collaborative market place with multi-sided business models involving several partners?
AS: We’re definitely seeing that, at least for the leading telcos. Rather than being prescriptive with suppliers they’re being very open. We work with Sprint and it has very robust processes for strategic sourcing. Rather than running a reverse auction to get to the lowest cost they capture more information by running both reverse and forward auctions to get both more features and the lowest cost. In the past, it would be just lower cost that dominated.
GM: Operators are starting to use cloud solutions as a means to save cost but a common misconception is that cloud solutions don’t involve significant costs. How can operators controls their cloud costs as they migrate even some mission critical systems onto cloud platforms?
AS: The cloud gives more transparency into cost and flexibility. Overall total cost of ownership (TCO) goes down and cloud is beneficial because it saves on implementation and upgrade spending in contrast to old, on-premise solutions.
Historically, the resistance point was security because people felt concerns about control. Being able to offer multi-instance rather than multi-tenant cloud avoids the scenario where if one tenant is breached all tenants are breached.
GM: What new approaches to procurement are you seeing?
AS: An indirect result of the splintering of the technology is more data but that makes it harder to pull everything together and assess the landscape in its entirety. One of the aspects that is changing for suppliers is collaboration. This means procurement involves not just a supplier and customer but also other stakeholders such as partners of the customer or the partners of the supplier that are brought together to create the solution.
Deutsche Telekom and Orange, for example, use a joint planning capability [for their joint activities]. If you are trying to do things and each decision requires a call between partners it limits what you can do. Digitisation and secure sharing of information and workflows can definitely help the organisation side and improve the level of collaborations.
A big aspect of innovation is digitisation and automation and companies are working towards this. However, this in itself doesn’t give you an edge, it just puts you on par with your best competitor. Therefore, what we’re trying to do is get new ideas out into the market that generate revenue. Automation is really just the middle stage of the transformation businesses are going through.