At FedEx, strategic sourcing navigates the software buy
By By Susan Avery -- Purchasing, 9/21/2000 2:00:00 AM
For a company whose greatest competitive differentiator is technology and service, there's no question that strategic sourcing should have responsibility for the software purchase.
Such is the case at FedEx Corp., the $18 billion transportation, information and logistics company. Its companies-FedEx Express, FedEx Ground, FedEx Custom Critical, FedEx Logistics and FedEx Trade Networks-which operate independently, but compete collectively under the FedEx brand worldwide, deliver some five million shipments every business day. It handles more than 100 million electronic transactions per day-and invests about $1.5 billion each year in information technology.
"Our focus as a company is on customer service, technical leadership and industry innovation," says Gregory A. Buchanan, manager of strategic software sourcing. With a BS in industrial operations management from Louisiana Technical University, Buchanan has held several corporate sourcing positions. He began working at FedEx as a supply market advisor in 1997.
As manager of strategic software sourcing, Buchanan is responsible "for achieving value for the enterprise on large-dollar software deals" for single PC products, distributed computing and mainframe platforms. Software purchases he and his team typically are involved in include mainframe, operating systems, applications and tools. He and his team support the IT group within FedEx Express and services; IT is strategic software sourcing's internal customer.
What the team does to achieve value for FedEx is recognize that elements which characterize the software purchase fall into two categories-cost elements of value (product/service, transaction, training, maintenance, support, lease/finance, warranty, trade-in, inventory carrying costs, etc.) and non-cost elements of value (risk containment, quality, availability, reliability, compatibility, customer support, involvement in design/ development, dedicated account support, etc.) "Our challenge," Buchanan says, "is to comprehensively understand what's important, why, and prioritize in the categories above and craft an agreement to fit the internal customers' 'solution image' while ensuring the agreement is a win/win proposition for both sides."
It's important to FedEx that strategic sourcing be involved in the software purchase for several reasons. For one, strategic sourcing helps to provide the corporation with "long-term contract continuity." For another, the function has the capability to utilize greater cross-functional team sourcing opportunities. Also, the team has a broad software strategy and negotiation skill set.
This was not always the case. As recently as three years ago, IT sourcing was a tactical operation, with the IT function negotiating many of the company's software deals. A reorganization of both the sourcing and some IT functions in 1997 now has the managing director of IT sourcing reporting to both the vice president of strategic sourcing and a vice president of IT. This move has helped FedEx save some $50 million to date (PUR: Jan. 15, 2000; p. 123).
"Then, the sourcing process for software was much more user driven, as compared to the current team-coordinated contract approach," says Buchanan.
Strategic sourcing involvement
In describing the term "contact continuity," Buchanan turns to Paul Lanigan, supply market advisor. In his role, Lanigan facilitates strategy development, negotiates software agreements and implementations along with providing leadership on various e-commerce initiatives at FedEx. He has more than 10 years of worldwide IT and software strategy sales and sourcing experience. Considered a "subject matter expert," Lanigan's software knowledge spans from operating systems, applications, middleware and tools across all platforms (both distributed and mainframe).
As many buyers well know, there are numerous costs surrounding the software purchase-maintenance fees, support fees, consulting fees, etc., explains Lanigan. "It's very important to the company to have a long-term commitment to maintenance," a point that is consistently considered by software strategic sourcing during a negotiation. "Having continuity of contracts provides a great deal of benefit to FedEx as a corporation."
(Software maintenance typically allows a buying organization access to the latest software revisions, bug fixes and product support.)
A unique purchase to sourcing operations at every company, software "rights to use" are acquired by buyers. "Sizing the buy is a challenge," says Lanigan. By this, he means determining the number of users within-and, in some cases, outside-the company and the value the company derives from using the software. "It's not like buying a PC or another tangible product, where one knows exactly how the product will perform. Purchasing software is very dynamic."
In evaluating software costs, a buying organization needs to manage what will be purchased, how it will be deployed, and who/how many people need it. At the point that these sizing requirements have been assessed, then the buying organization will need to match the opportunity to the optimum cost structure (for software, these include enterprise, discount, tier, etc.)
To demonstrate, Buchanan compares the cost structure of hardware vs. software. By eliminating the G & A cost component from both scenarios, what remains for hardware is each unit sold has a fixed hard cost to be recovered associated with it. Fixed cost with software is less of a constant because an organization is buying an idea or an intangible product.
"Software maintenance, for instance, typically improves a product," says Lanigan. "The product can become more valuable over time. Conversely, hardware typically becomes obsolete over its shorter life cycle and more frequently has to be replaced."
As complicated as the software purchase can seem to be, Buchanan says he faces a bigger challenge common in the industry of hiring and retaining qualified employees or, as he puts it, "the three Ts: talent, turnover and transfer of knowledge. A top quality software sourcing professional, he says, "has the capability to lead teams, prioritize and juggle projects, manage time, and has strong project management skills, all essential ingredients for negotiating key strategic deals."
Specifically, what he looks for in a software sourcing professional is demonstrated performance as well as industry knowledge.
As a group, strategic software sourcing focuses on the agreements that are most important to helping FedEx keep its customers successful. (FedEx was one of the first to install desktop PCs loaded with its proprietary software at customer locations for ordering and tracking deliveries.) "Customer requirements change," says Buchanan. "Technology changes-rapidly. So, we frequently have to juggle projects." Strategic sourcing keeps in touch with customers' changing needs through cross-functional teams consisting of representatives of software development and engineering, marketing, legal, communications and others. Membership of the teams is driven by individual projects.
Online ordering
Today, internal customers of strategic software sourcing use the Ariba orms (Operating Resource Management System) to place orders with pre-approved suppliers online. Buchanan explains that requisitioners use a browser to simply point and click to order standard products for operating system and application software. (Lanigan likens these purchases to "shrink-wrap" type buys.)
Benefits to FedEx resulting from having requisitioners order software online include more timely ordering and accessibility to purchasing history, among others.
For larger applications, or exception, purchases, strategic software sourcing uses a paper-based process. Typically, these would be mainframe products which are not high-volume purchases, but high dollar.
Strategic software sourcing has agreements with both resellers and manufacturers. Buyers evaluate suppliers based on responses to a formal request for proposal (RFP) process. Selection criteria include: timing, technology and customer requirements, and life cycle costs.
With the help of a cross-functional team (of which IT is a member) strategic software sourcing measures supplier performance based on service levels and total cost. The team defines performance and acceptance criteria for the different types of software the company purchases. Support/maintenance is measured by calls (on site, off site) and releases per year. "At the end of the day, there's a cost associated with software," says Buchanan. "We have to determine, measure and communicate these benefits for FedEx's customers, shareholders and employees."
Looking ahead, FedEx will continue to evaluate e-commerce opportunities. Specifically, Buchanan says that the company "will continue to focus on what makes the most sense and will drive maximum value to FedEx customers.
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