Automotive Software’s Next Challenge Is Procurement – And It Needs to Be Addressed Today - Berylls

he structured and linear procurement model of the past must give way to a new collaborative approach.

Automakers need to adapt their procurement systematics and acquire new skills in order to source software successfully.

Earlier this year, Mercedes-Benz announced it would no longer be offering a proprietary automotive navigation and map system in favor of collaborating with Google. This signaled a significant change in the company’s software and procurement strategy. The German OEM was effectively announcing that developing, running, and maintaining core elements of its vehicle software stack required new supplier relationships in order to stay competitive with other car manufacturers – including collaboration with companies from non-automotive sectors.

Today, an estimated 73% of value creation in automotive R&D is hardware-related, but before long, the majority of value will be delivered by the software running on it. We can already identify some successful frontrunners today like Tesla and new entrants from China.

In recent years, OEMs have realized that they do not possess the in-house capabilities and resources to develop a full software stack including E/E architectures, underlying operating systems, and consumer-facing applications and services. BMW’s Senior Vice President of Electronics and Software Christoph Grote recently said: “It is completely unrealistic to build almost all software components yourself as a car manufacturer. Those who do so isolate themselves.”

However, the balance of power is also shifting. Large tech companies like Apple, Google, Tencent, and Huawei become essential contributors to software-defined vehicles. Driven by high customer expectations for the standardized integration of their platforms and services across car brands, the bargaining power of OEMs is steadily decreasing.

Consequently, OEMs needed to learn that while in the past, they were in the position to dictate a customer/supplier collaboration with Tier-1 and Tier-2 suppliers, this role may be subject to change in the era of the software-defined vehicle.

Pricing stands as the most potent lever for increasing profitability within the automotive sector. Consequently, it should take center stage for all Original Equipment Manufacturers (OEMs). However, it’s essential to recognize that Revenue Management extends beyond Pricing. It involves a strategic business practice adopted by companies to maximize their revenue and profitability through the optimization of product or service pricing. This discipline entails the application of diverse pricing strategies, data analysis, and forecasting techniques to make informed decisions about price setting, resource allocation, and capacity management. The primary components are depicted in the chart below. Pricing emerges as the most significant lever for enhancing profitability, making it of utmost importance for top management.

A new collaborative and flexible software procurement framework is needed

This significant role and power shift implies that OEMs will have to source key elements of their vehicle software externally while at the same time ensuring state-of-the-art integration into their vehicles in order to maintain a competitive edge. The traditional “design-bid-build” model, which is characterized by highly specified requirements, strict cost discipline, and high-volume orders, is unlikely to work in this case.

A new collaborative and flexible software procurement framework for design, development, and delivery is needed to enable co-development and partnerships. You cannot plan software development efforts years in advance. As a result, the framework must reflect the needs of the fast-moving and fast-changing nature of software projects where scope, timeline, and technology change more frequently than in classical procurement processes. This will require both internal empowerment and new evaluation criteria to assess software partners.

Figure: Software Procurement is different

Source: Berylls Strategy Advisors

In terms of internal empowerment at OEMs, we have identified four success factors:

Eye-level collaboration: The classic relationship between an OEM and its suppliers is a hierarchical one in which the OEM sets targets and directions and makes the important decisions. If a project goes wrong, many OEMs have specialized task force teams that will “invade” the supplier and take over operations. Due to the existing lack of software competencies at OEMs and the power of large tech providers, this approach will not work for many software projects. Software collaboration demands shared beliefs and a strategy underlying a joint approach toward the development of software products. This is why our first success factor is “eye-level collaboration.” This means that shared responsibility allows each party to contribute their unique expertise and capabilities while sharing risks related to technology, market, and regulatory compliance. Procurement must take this position on the OEM side and constantly steer this relationship with supplier management. This establishes the foundation for more flexible requirements and target setting as well as new contract and business models.

Flexible requirements and target setting: The playing field of software-defined products needs a completely different approach to target setting and documentation. Moving away from rigid specification sheets and towards flexible requirements will allow for changes and adaptations in the scope, timeline, and deliverables of the software. This approach will benefit from agile development methodologies, which emphasize iterative and incremental delivery of software and may include performance metrics that are tied to the achievement of project milestones and goals (e.g., achievement of a defined number of story points), rather than strict adherence to predefined functional requirements. Challenges arising out of this “softer” target agreement must also be addressed through new contract and business models.

New contract and business models: Traditionally, the classic contract model between an OEM and a supplier has focused on two parameters – unit price and development cost. Software was usually included in the (one-off) unit price of the hardware component. Today, however, new business models are needed for continuously developed and delivered software components. OEMs may need to evolve beyond a software license model based on production volume, irrespective of software usage intensity, and consider time-/usage-based payment models that better take into account ongoing supplier development and maintenance costs. Indeed, we predict that software-as-a-service business models will become the new normal. A further step is the participation of software suppliers in vehicle or function sales (e.g., autonomous driving functionality). This business model is applicable, especially in terms of long-term strategic partnerships and cooperation.

Software assessment competence: Procurement needs to increase its ability to understand and evaluate software and deepen its connection to hardware. This includes knowledge of the overall software architecture with all its dependencies, common programming languages, software development methods, and systematic procedures for the management of critical projects. Therefore, procurement needs to establish a close relationship to development departments in order to build up this understanding in addition to its commercial competence. This competence is crucial in order for procurement to remain a neutral partner between the supplier and the OEM development departments. It is the foundation for negotiation in the initiation phase and the basis for a successful partnership.

In addition to internal empowerment, OEMs should consider four evaluation criteria when assessing potential software partners:

Software delivery model: Compelling software products are the result of efficient development, rigorous testing, feedback loops, and appropriate adjustments throughout the product lifecycle. Suppliers need to offer a software delivery model that implements new requirements fast in agile teams using shorter release cycles and DevOps methods. Short feedback loops within the development value chain, from the OEM to the supplier, are a prerequisite for shortening time-to-market while maintaining quality. This enables continuous development, refinement, and delivery of software components “as-a-service” over the entire lifecycle. It stands in contrast to the traditional, SOP-focused delivery models used for hardware projects.

Software flexibility and efficiency: A modern vehicle with its increasingly centralized computer architecture processes hundreds of millions of lines of software code – it is now estimated that a typical electric vehicle uses four times as much code as a commercial jetliner. Even though computing power is continuously increasing, the complexity of porting software to multiple platforms makes the flexibility and efficiency of acquired software a strategic issue. Buyers and suppliers must move from developing static, monolithic software tailored to specific hardware to prioritizing a flexible and modular cross-domain software portfolio.

Automotive software steering competence: Nowadays, organization in agile teams to develop and maintain software is pretty much standard. But the implementation of these practices varies vastly across organizations and hierarchies. Currently, there is no global blueprint on how car software is developed and steered. The supplier’s management team in particular needs to be able to assess and handle the steering of software projects and the interfaces to the OEMs as part of automotive systems engineering. This includes efficient decision-making, prioritization, harmonization with hardware engineering, and communication in a much more volatile setup than with traditional hardware projects. And, if a project turns critical, the ability to manage overarching task forces up to and including the highest levels of corporate leadership is crucial.

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Processes, methods, and tools: As future automotive software will consist of both prepackaged on-board components and ad-hoc additive components, this combination will require holistic underlying processes, methods, and tools. When choosing a supplier, the consistent use of PMT across the value chain needs to be considered to ensure collaboration efficiency. One special area of focus is the requirement management process that needs to be standardized via tools and aligned processes.

The big shift

The move to software-defined vehicles is transforming the automotive procurement landscape and requires procurement professionals to adapt their practices in order to effectively source and manage software suppliers.

This means that the process and the principles of procurement must reflect the business logic of software, which is closer to signing a service contract than buying a product. To establish an innovative and future-proof software procurement organization, OEMs will need a deeper understanding of software development, supplier management, industry standards and regulations, intellectual property, and talent management. The key is self-empowerment: OEMs need to develop the necessary skillset while at the same time creating flexible and resilient organizations to manage software supplier relationships that have broken free of the “captive supplier” model and more closely resemble collaborations and joint ventures. Markdowns will not be the dominant measurement for success of procurement.

This shift will not be easy, but the software-defined automotive future demands it.

Author

Sebastian Bräuer

Associate Partner

sebastian.braeuer@berylls.com

Sebastian Bräuer

Sebastian Bräuer (1982) joined Berylls by AlixPartners (formerly Berylls Strategy Advisors) in 2022 as Associate Partner. He started his career in consulting where he led and supported assignments with focus on operational excellence programs primarily in automotive but also in consumer goods and chemicals. Later Sebastian worked for an German OEM in leadership roles regarding organizational development, digital product offering and digital car strategy. At Berylls Sebastian focuses on topics regarding Digital Car.

Sebastian graduated in economics and engineering at the Technical University of Dresden.

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