How to build a procurement process at any stage of growth
- Procurement is part of the supply chain and is a set of strategic processes that include the sourcing, negotiation, purchasing, receiving, and payables of goods and services a business needs to operate.
- A procurement process is essential to a business at any stage and includes a statement of need, strategic sourcing, purchasing, contract management, and supplier relationship management.
- The procurement process strategy used depends on the size and unique needs of the company.
- A procurement process is especially important for SaaS buying and a lack of process can cause waste, unnecessary spend, and inefficiencies.
A solid procurement process is vital to a thriving business at any stage. What that process looks like at each stage may differ and will evolve as the business enters into different stages. For example, the procurement needs — especially for SaaS — at a small start-up will be significantly different than those of a large enterprise. As a result, the procurement processes will vary.
What does a world-class procurement process look like through each stage of a business? The following procurement and SaaS buying practices and challenges to address can make a difference in companies ranging from start-ups to Fortune 500.
What is procurement?
Procurement is part of the supply chain and is a set of strategic processes that include the sourcing, negotiation, purchasing, receiving, and payables of goods and services (including SaaS) the business needs to function and thrive. If a business needs a customer relationship management solution, it would go through the procurement process to source and acquire that solution.
Whether the process is manual or more effectively managed by procurement software, the steps of the procurement process are essential. Without a procurement process strategy in place, things like SaaS buying can result in unnecessary spending and inefficiencies.
What are the steps of a procurement process?
There are five steps in a procurement cycle that apply to any company, regardless of size.
- Step 1 – Statement of need or purchase request: During this step, the procurement team becomes aware of a need. They may receive a purchase request, a purchase requisition with a contract supplier, or a meeting with stakeholders to address a more complex need.
- Step 2 – Strategic sourcing: If step 1 was a meeting to discuss a complex purchase request, it will result in strategic sourcing. This involves market research, a make-or-buy analysis, specification development, and then an RFQ or RFP selection process.
- Step 3 – Purchasing: The purchasing process happens when the purchase requisition is approved and converted into a purchase order. The order is processed by the supplier, then received and paid for by the organization.
- Step 4 – Contract management: This is an ongoing step where procurement manages ongoing renewals, negotiates price increases, tracks performance metrics, and works to resolve any contract-related issues.
- Step 5 – Supplier relationship management: The last step of the procurement process is supplier relationship management, which is also an ongoing process. It involves categorizing the supplier into the appropriate segment, measuring their performance, and looking for opportunities to enhance the supplier relationship.
Building your procurement process at every stage
As businesses grow and change, so must their procurement process. Here is what a business can expect the procurement process to involve at different stages of growth.
Start-up: Up to 100 employees
Young companies tend to take a "roll up your sleeves" approach to procurement in business. While they can use help with the SaaS buying process, a procurement team is far on the horizon. It's up to someone in the C-suite (usually a CEO or CFO) to lead the procurement process. This person is in the weeds on each software deal, net-new, or renewal. There is a hidden cost associated with this approach.
When an executive is leading the procurement process, their sunk time quickly escalates. In 2020, small companies spent on average just over $200,000 on SaaS, with an average of 102 apps, according to a Blissfully annual SaaS trends report. Even for lean, agile companies, that makes SaaS purchasing and management a heavy time investment for a key contributor.
There are other side effects of C-suite involvement. With the CEO or CFO in the weeds, process development may hit the back burner in favor of "getting things done." After all, the path between the stakeholder requesting software and the decision-maker is short. It's a straightforward arrangement, but not scalable. As the company grows, that CEO or CFO must hand SaaS purchasing off to a dedicated procurement manager (and the sooner, the better).
Medium-sized companies: 101-1,000 employees
After the first 100 or so employees, the org chart begins to deepen and the work of purchasing grows. These companies averaged $2.47 million spent on SaaS services in 2020 — or $8,580 per employee, according to Blissfully. Connection complexity grows as well, with over 4,000 app-to-person connections to an average of 185 apps.
At this stage, senior executives no longer conduct vendor evaluations or negotiate contracts. SaaS procurement details often fall to the director of finance. The CFO can maintain visibility into overall spend, but the procurement process becomes larger and more complex as the company grows. This is where instances of tail spend and "shadow IT" start to flourish.
At smaller companies, the contract and renewal processes are new, so they require an upfront time investment. As companies evolve and expand, the director owning the SaaS buying process now arrives at a similar crossroads as the CFO did. The strategic value finance directors add becomes lost in the minutia of dealing with the procurement process.
Large-sized companies: More than 1,000 employees
With enterprise status, SaaS complexity and necessity continue to increase, with an average of 21,580+ connections between employees and apps, according to Blissfully. Granular tracking becomes imperative to controlling spending. The purchasing process becomes a team lift between finance, security, and legal.
At this point, procurement has at least one role in charge of the tech stack. Though this streamlines and eases the burden on finance roles, SaaS buying remains a cross-functional and all-hands endeavor.
Much of a procurement professional's time goes to process improvement and systems development. In large organizations, this doesn't leave time for the low-hanging fruit.
Growth challenges in SaaS buying
Companies of all sizes must balance spend and risk. Clear communication is the best starting point in creating a procurement process flow that achieves this. Depending on size and stage, SaaS management services, automation, and third-party vendor management can play an increasing role in easing the burden.
These are a few key areas to address for controlling spend and reducing liability. They work at any stage and have an immediate impact on efficiency, security, and the bottom line.
Undefined processes that lead to shadow IT
When a team is small, surfacing needs and getting solutions is simpler. Purchasing SaaS may be as easy as a Google form or an expense report. But as companies grow, process complexity naturally grows with it. Without a procurement strategy process in place, expensed and card-based procurement can create budgeting chaos.
Duplicate apps or contracts
Another consequence of informal purchasing is duplication. Siloed processes make it difficult to see spend across departments, leading to duplication and unused software. Because of this, redundant contracts may include separate maintenance or annual administrative fees. The silos also obscure license volume and result in discrepancies, which could affect pricing.
Abandoned or orphaned subscriptions
As headcount evolves and companies experience employee turnover, SaaS subscription abandonment can become costly. Without a system for managing software licenses and subscriptions, shadow spend can continue without supervision. This is especially true when software is set to auto-renew.
The SaaS adoption and abandonment cycle
Canceling or moving vendors can become costly over time. According to Blissfully, on average, companies experience 58-63% app turnover in a two-year period. This fast-paced software churn leads to waste and reduced capital efficiency. The adoption/abandonment cycle reduces visibility, increases risk, and strains IT management.
Improving procurement in business at every stage
Visibility and leverage are two powerful tools for balancing growth with spend. Handling contracts, users, business needs, and the renewal process is a full-time job.
For start-ups and growth-stage companies, establishing a SaaS procurement process now can smooth the way. It allows your organization to establish best practices and avoid spending pitfalls. For C-level execs, stepping away from SaaS management tasks earlier to focus on company strategy is key.
Even with a full procurement team at your disposal, having SaaS buying and management processes to back every negotiation makes life easier. Instead of putting out fires, your team can tackle big-ticket items that move the needle. Freed from redundant tasks, the value of your procurement and finance teams becomes fully realized.
SaaS buying and vendor management are a part of life for modern businesses. Vendr can make the procurement process easier and help procurement leaders wrangle SaaS spend. Learn more about Vendr’s SaaS procurement services.