By Christopher O'Malley
There is a lot of concern in the financial markets that another recession looms before us. Growth seems to be evaporating worldwide and Europe's continuous deluge of bad news appears to be driving markets to a tipping point.
Times such as these are a source of significant business disruption that cause fire drills to save profits as a means of weathering the storm. Forty years ago, such circumstances would have been ominous for heavy manufactures such as John Deere, CAT and even companies such as IBM with a high dependance on in-sourced manufactured hardware. Forty years ago, the tendency to in-source the majority of the manufacturing efforts for these organizations created a fixed cost business model that was inelastic in scaling down to recessionary demand. This inevitably resulted a sudden swing to unprofitability that left shareholders nauseous and businesses often in crisis.
A few years back, I saw a presentation by the CEO of John Deere. He discussed Deere's transformation to a best in class supply chain management firm and the resulting economic implications to their business. The greatest benefits were derived by appropriately sourcing services (both internal and external) based on measures of risk/value and establishing a variable cost structure to more rapidly scale supply to demand. John Deere achieved better value/cost by sourcing services from companies that are minaically focused on a well defined service and built a variable business model designed for sustain profitability.
I'm sure you;ve heard over and over again that the cloud has fast become a viable supply chain source for IT and, as a result, IT must rapidly develop supply chain management expertise to best exploit. The benefits to be gained are similar to those that manufacturing has enjoyed for decades. Even so, many still question whether IT's relative budgetary size within the business is large enough to move the profitability needle in a meaningful way. They acknowledge that the concept of IT supply chain is interesting from an operational effectiveness perspective, but they question the real impact on long term profitability.
Clearly, John Deere gained enormous benefit to their bottom line by becoming a best in class in supply chain manager given the significant cost of manufacturing to their business, but those material gains have long been harvested. In 2012, we are in a mode that every single point of margin has a big impact on shareholder value. For many companies, rounding profit margins up or down means beating or missing expectations in a very unforgiving market. As such, IT's opportunity has never been so important to make an impact on sustained profitability given the readily available services that the cloud offers.
In researching how IT should build and execute a plan for IT supply chain management, I came across a 2002 documented briefing by Rand to the US Air Force entitled, "Implementing Best Purchasing and Supply Management Practices - Lessons from Innovative Commercial Firms" This is detailed 230 page paper, but the lessons learned from manufacturing are incredibly relatable to what will happen in IT over the next few years. For those interested, I'd encourage you to read the Forward and skim the rest for relevance. John Deere was used as a case study on supply chain strategy and vendor management (starting on Page 124) that is especially helpful, as well as, the examples that follow into the document.
The goals of aligning IT to the business and running IT as a business are no longer aspirational, but demanded. Lessons abound on strategies and best practices for supply chain management. The cloud provides the means and a possible recession the catalyst for change. This is the perfect time to lead a transformational effort within IT.
Economic value ultimately determines whether market disruption evolves into lasting change. The cloud was a market disruption born in the last recession that will dominate in the next as the supply chain for IT.