Edward J. Kovac, C.P.M.
Edward J. Kovac, C.P.M., Procurement Director — Network Services, AT&T, Middletown, NJ 07733, 732/420-2917, email@example.com
Introduction. The telecommunications industry uses sophisticated software to operate their internal computer systems and to provide voice, data, and video services to their customers. Initially, telecom service providers developed much of this software themselves. But, as the industry has evolved, they have come to rely more heavily on procurement from outside suppliers. Both commercial and custom-developed software are used. This paper describes the software procurement process as it has evolved in the telecommunications industry. It also endeavors to explain why software procurement is complex, who is involved, what the procurement processes are, and how the processes can be managed more effectively.
Software in the Telecom Industry. Software is used extensively by the telecom industry to provide both internal and external services. Internal services software supports desktop computers and corporate systems and is similar to IT (Information Technology) software used in other industries to increase productivity and decrease operating costs.
External services software, on the other hand, supports revenue generation for the company and can be a determinant factor in a telecom company's competitiveness. Software is used extensively in telecom network elements (switching, transport, signaling), operations systems (service provisioning, billing, fault monitoring), and service nodes (operator services, message services, calling card processing).
Initially, many telecom service providers developed the software for both internal and external services themselves. (i.e. make vs. buy). But, as the telecom industry has evolved, the service providers have come to rely more heavily on software procured from outside suppliers.
The procured software can be categorized into three distinct types:
Commercial software is standard, off-the-shelf software that anyone can buy (i.e. license). Typically, it is easier to procure and less expensive but it doesn't always match the customer's needs. Custom software, on the other hand, is a unique product built by a supplier to the customer's specifications (usually involving intellectual property). It is typically more difficult to procure and more expensive but usually comes closer to matching the customer's needs. To gain the advantages of each approach, hybrid software systems have evolved which include some commercial modules, like operating systems and databases, combined with other modules that are custom-developed, like user-interfaces and applications.
Why Software Procurement is Difficult. Software has several attributes which complicate its procurement. Basically, software is
A software product is multi-faceted. It includes source code and object code which can only be deciphered by specialists. In addition, it requires documentation and training in order to use it. Furthermore, on-going maintenance and support are required to keep it functioning properly. A software product may also be frequently changed via upgrades and enhancements. All these software product deliverables are supposed to be developed in response to requirements provided by the customer, but the match up is seldom 100%. Hence, the procurement process for software tends to be complicated from start (bid solicitation) to finish (contracts, remedies). It usually involves more than a one-time buy and, instead, involves numerous buys of various deliverables over extended timeframes.
Who is involved in software procurement. The parties involved in software procurement have some attributes that set them apart from the norm:
Procurement Process for Commercial Software. Typically, the process for procuring commercial software for enterprise applications is relatively straightforward. First, an RFP is used to solicit and evaluate competitive bids in response to the customer's requirements (statement of need). Then, a contract is negotiated with the successful bidder which includes right-to use (RTU) licenses, warranty terms, support and maintenance terms, and conditions regarding upgrades and enhancements.
The RFP process can involve software suppliers who sell direct or who are re-sellers. Some suppliers sell either way. Re-sellers offer additional services including the administration of orders and licenses as well as the management of customer introductions of new software releases. In addition, many re-sellers are MWBE. The evaluation of RFP responses should not be based solely on price. Other factors such as the level of on-going support and acceptance of contract T's and C's should be included in the evaluation.
The resulting contract should specify RTU license terms including specification of whether individual, site or enterprise-wide licenses are involved. In addition, the duration of the licenses, either "term" or "perpetual", should be specified. The contract should also spell out warranty terms. Post-warranty maintenance terms which usually do not include bug-fixes but do include upgrades should also be specified. The price for post-warranty maintenance should always be included in the original contract negotiations and never be put off until the warranty expires and the customer has lost leverage.
Procurement Process for Custom Software. Custom software procurement is usually more complicated. First, since intellectual property is involved, Non-Disclosure Agreements (NDAs) should be established before meeting with suppliers. During the RFP process, detailed Statements of Work (SOWs) are used to ensure that the customer clearly conveys his expectations to the supplier. In addition, since new computer code will be delivered to the customer, extensive acceptance tests are required. A separate trial agreement is often used to specify the scope and direction of software acceptance tests. Finally, warranty terms for the initial release and for future releases must be clearly stated in the contract.
Post-warranty maintenance costs and levels of support should always be included in the original contract. Maintenance support for custom software differs in several ways from maintenance for commercial software. First, bug-fixes are often included but upgrades/enhancements usually are not. Performance warranties (i.e. up-time) are often required for custom software but usually not for commercial. Finally, maintenance costs for custom are usually X% of cumulative development costs whereas maintenance costs for commercial are often included in the license fees.
Procurement Process for Hybrid Software. Hybrid software procurement combines the processes for commercial and custom-developed software. For example, a hybrid software system might be comprised of the following modules and procurement modes:
Note that in addition to the various functional modules (e.g. operating system, database, etc.) a separate set of integration software is required to enable the various commercial and custom modules to interwork. This integration software also allows the hybrid system to interface with other software systems used by the company.
Hybrid software in the telecommunications industry has evolved as a result of a series of alternative approaches:
How to manage software procurement more effectively. Some tools that have proven to be effective in managing software procurement include the following:
Conclusions. Software procurement is a complex process that must be managed carefully. As a general rule, it is advisable to initiate procurement strategies in the following order:
In all cases, the extra effort expended early in the software procurement process to define realistic schedules and to define clear communication paths between supplier and customer will help align the expectations of all parties involved in the process. Also, assuring that Non-Disclosure Agreements are in place before any negotiations begin is critical for custom software and can be a reasonable precaution for commercial software as well. Finally, ensuring that the purchasing professionals assigned to software procurement have the required technical, legal and business knowledge, as well as project management skills, enhances the likelihood that the software procurement will be successful.