For many Fortune 500 organizations, the number of software suppliers leveraged each year is increasing rapidly. This post discusses how this trend may be a sign of cost inefficiencies and then proposes a few strategies that procurement can use to overcome these constraints.
The current sharp rise in the number of purchases from new software suppliers is due to two reasons. First, stakeholders who are looking to procure software aren’t only concentrated in a firm’s IT department; they are spread across all functions within an organization. Additionally, the unique nature of their requirements, coupled with rigid organizational structures, cause them to make purchasing decisions without triggering alignment across the business functions.
Second, these decisions are justified by comparing the purchase price of software with the benefit it delivers. While new niche suppliers can deliver the most value for specific use cases/requirements, the rise of software as a service (SaaS) has led the purchase price of their solutions to fall. Overall, these two factors have led to a sharp rise in the number of purchases from new suppliers, which is problematic from a cost standpoint due to the following reasons:
1. Overlooks “hidden” integration costs:
As stated above, the prominence of SaaS has caused a greater number of potential software purchases to be deemed as net positive. However, purchase price is only one piece of the cost picture. For software to deliver its true value, it must communicate and integrate with a company’s existing IT systems. Costs to integrate with legacy systems can often be substantially higher than the price of the solution itself, hence causing the value delivered by a certain solution to be negative.
2. Conflicts with benefits of SRM:
An organization’s strategic suppliers are often part of a supplier relationship management (SRM) program, whose benefits hinge on channeling a greater spend through chosen suppliers. Increasing the number of software suppliers leads to the disaggregation of spend across multiple suppliers, which directly conflicts with the purpose and benefits of SRM.
3. Redundant software:
The existence of multiple pieces of software that cater to the same set of requirements can be prevented by vetting existing solutions prior to purchasing new ones. However, the lack of cross-functional alignment causes stakeholders to overlook existing software in their decision process. This inevitably leads to redundancy within a company’s IT ecosystem and creates cost inefficiencies.
An IT procurement team may employ the following strategies to overcome the above-mentioned issues:
1. Lower spend threshold for involvement in software purchases:
An IT procurement team often uses spend thresholds to determine involvement in hardware, software and services purchases. SaaS-based software solutions, particularly niche ones, often fall under this threshold. Further, as stated above, the cost of acquiring a piece of software is often much lower than its total cost of ownership. Hence, the first step to mitigating issues highlighted above is to create a separate, lower threshold that determines procurement involvement in software purchases.
2. Creation and adoption of standard processes:
While procurement must check low spend software purchases, it must also retain its focus on high spend initiatives as the latter delivers maximum savings. One mechanism that enables procurement to achieve this balance is through the implementation of standard processes. For example, a simple checklist that stakeholders are required to fill out as part of the purchase process could ensure that hidden costs are accounted for and strategic suppliers are considered prior to any new suppliers being onboarded.
3. Partnership with IT strategy and architecture team:
These teams often have a holistic understanding of an organization’s IT ecosystem and help shape future strategy. By collaborating with them, procurement can ensure strategic suppliers and existing software solutions are considered when looking at new purchases. Evaluation of these two aspects, prior to on-boarding new software suppliers, will drive cost efficiencies.