I recently received a Request for Tender (RFT) from a large financial services company for the supply of specialist IT skills across a range of disciplines and technologies. In general, the RFT was fairly standard in the information being sought, although I was surprised, and somewhat perturbed, to see the following question near the end of the questionnaire:
“Would your organisation be prepared to participate in eNegotiations as part of this procurement process?”
For those not familiar with eNegotiations, a good overview can be found at http://www.tradeinterchange.com.au/leftnav_educational/reverse_auctions.htm. In essence, eNegotiations are online ‘reverse auctions’, where the purchaser seeks the lowest price for a particular commodity from the vendors participating in the auction, typically during a one-hour timeframe. During that hour, the bidders usually see the ‘current winning bid’ and have the option of become the new ‘winning bidder’ by lower their previous best price.
This process may seem to create significant economic value for the purchaser, until one asks the questions “what am I actually buying?” and “what will I actually get from the winning supplier(s)?”
One of the core tenets of reverse auctions is that the goods and services being purchased are for all intents and purposes ‘commodities’ (i.e. a physical substance … which is interchangeable with another product of the same type ). Sure, there is usually a minimum qualitative bar that organisations participating in the auction must exceed, but after that, it’s all price, price, price.
Which begs the question: is one Project Manager/ Enterprise Architect/ [insert skill set] really interchangeable with the next?
To illustrate my concern with this question, let’s just change the context to another provider of professional services – the legal profession.
Suppose you have just been wrongly accused of a traffic violation and you need a lawyer. Do you look for the cheapest lawyer you can find, or do you try to find one with a good track record of getting the charge dismissed? Sure, you don’t want to pay too much for the advice, but what is the main driver in your thought process – getting a cheap deal or getting the right outcome? I would suggest the latter is usually the main consideration in most people’s minds.
Which brings me back to the financial services organisation’s intention to use reverse auctions to get the cheapest price for specialist, professional services. As professionals (and the services they provide) do not even come close to the definition of commodities, the likely outcome is that the lowest-cost provider will prevail in the auction process, but the ‘winner’s curse’ will be that they will most likely have bought the professionals with the poorest past performance.
So given that financial services organisations usually demonstrate considerable acumen in business dealings, why would they seriously consider treating IT professionals as commodities in the procurement process?
Unfortunately, the answer is probably an indictment of the IT industry in general. With IT projects continuing to suffer from late deliveries, bloated software, project cancellations and budget blow-outs, executive management is increasingly viewing IT spend as a ‘cost of doing business’, rather than a means of creating competitive advantage. This being the case, anything that can reduce this overall cost will, by inference, increase bottom line returns.
The IT industry needs to take on the challenge of changing this mindset in the executive management community. Otherwise, the software profession will become increasingly marginalised, which will bring real costs to the wider community, in particular the potential loss of the productivity dividend that has underpinned much of the economic growth the developed world has experienced in the past few decades.
The next article in this series will present some thoughts on how the IT industry can improve it’s reputation in the executive boardroom.
Creating Business Value 
The core of the issue lies in the manner in which IT departments have allowed HR departments to recruit & staff. Despite HR’s best efforts, hiring should not be a chinese menu where the people whom advance in the process are those with x years of skill a, y years of skill b, etc. Simply reading position requirements is enough to cause a stroke.
“So given that financial services organisations usually demonstrate considerable acumen in business dealings”….. Really?? I mean, REALLY???
Let me tell you that much of the engineering and construction business went this way a while ago – albeit not as visibly as using eNegotiations. Some clients believe that the services and people are “interchangeable” and that the quality of product is independent of the individual project manager and engineering staff skills… And like software development – this is demonstrably not true…
When using the word enterprise to mean modern business, everything an enterprise does is a commodity. The only reason enterprises ever keep in-house staff is the differential cost between training and outsourcing.
Wonderful article Eric. I’ve seen “quality” in software increasingly marginalized over the years. Companies are opting to completely rewrite bad software over and over rather than invest in something of quality that can be maintained. I believe you’re correct when you say it’s because of the industry in general. Companies that opt for quality are in no way guaranteed to get it no matter what they pay. There are too many fly-by-night vendors and developers around making a bad name for the industry as a whole, and companies are adjusting their approach accordingly. Perhaps that’s one reason doctors, lawyers, architects, etc… have to pass industry exams and get licensed before they are allows to practice. If the IT industry adopted this model, quality would rise, and we’d all be getting paid $450/hr.
It’s possible that the large financial institution did due diligence on quality before submitting the RFT. If they’re sending it out to everybody under the sun, that’s one thing, but when they’ve already determined the companies/groups that meet their standards then the bidding war should among roughly equivalent players. It’s not like they’re sticking it on rent-a-coder or something, right?
Enterprise development cannot be a commodity, as enterprise developers are not all created equal. I would be suspicious of an eNegotiation. If you go with the low bidder, you are probably going to get a developer from the bottom of the barrel.
“Enterprise Software” is typically full of schoolboy errors. With my security geek hat on I’ll mention just the most obvious one.
Why don’t these s/w writers first read a collection of enterprise security policies … or similar easily-available material such as guidance from the various CERT organisations? e.g. http://www.auscert.org.au/5816
If you are proposing usage clearly against guidance like that I will take it as evidence you know diddly-squat about enterprise requirements.
Eric,
This is no different than when companies are trying to hire employees, ask apriori what salary range a particular “candidate” is expecting to receive in compensation, except of course, that none of the “candidates” have the privilege of seeing who their competition is.
It’s not like most folks who’ve been in the business a while don’t know what the “going rate” in their locale is for a particular skillset, yet companies persist in this practice because, as you say, most often, the practice isn’t to necessarily hire the most qualified, but the most “cost effective”. I’m not convinced it’s a matter of reputation that has to improve in the executive boardroom. It’s the entire mindset about what IT ( Software Development, Hardware Services, Infrastructure Engineering, etc. ) actually MEANS to an enterprise. So long as it’s solely seen as a “means to an end”, and not as part of the actual assets of a company that need to be strengthened and preserved, it will continue to be marginalized and as you’ve very poignantly pointed out, marginalized.
There are a TON of bits and pieces, in my opinion that feed that continual erosion of the value add of IT, overall, and it isn’t just concentrated to the boardroom mindset, though obviously, that’s where it trickles down from, throughout the enterprise.
Sorry…trackback is wrong in my post. http://thegreenpill.wordpress.com
Corporations are structured on purpose to make everyone in it a replaceable cog. They like to think like that about highly creative and almost always unmeasurable activities as software development. I guess it comforts them to think that way, and to pigeon whole their creators.
And this is probably what they seek as well when they externalize their project. I would really hope that both the corporation and the bidders know that what each actually wants out of this transaction is quite different than what is discussed and signed off on initially. This is almost a law in software development. Neither side doesn’t really know what they want, until the project is done.
Great post, Eric.
I have one though / question for you.
Do you think corporate executives can be convinced to look upon IT services differently by expecting them to care about the impact on the productivity of the world economy?
I think we need to have such expectations to some extent from all of us as thinking humans, and we need to especially have expectations like that from politicians and people in pubic service.
But I think, while some executives will have some interest in how their decisions impact the world, most of them, to the extent, the law allows them will always be much more concerned with the bottom line of the enterprise / project they run.
This is not to say that we are out of ammunition to use in convincing them IT services can not be a commodity.
I think a much more practical approach though is to look for the risks they are taking with their own (or their company’s) success when they go for treating IT as a commodity.
Vladimir
*thought