The difference between software sourcing and software procurement
What’s the difference between sourcing and procurement? Discover how these two processes work together to improve vendor relationships and keep costs down.
Sourcing and procurement are valuable practices for saving money, supporting supply chain management, and ensuring a competitive advantage when buying software. Many people use procurement, purchasing, and sourcing interchangeably, and while they are not the same, the relationship between the concepts is essential. Defining your sourcing and procurement processes correctly will help you build a more robust software buying practice.
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We'll explore the key differences between sourcing and procurement and offer advice on creating efficient strategic sourcing and software procurement policies that offer more cost savings and better outcomes. We’ll also cover some of the pitfalls to avoid when buying software. With a better understanding of these functions, you'll be ready to negotiate and close your next software purchase successfully.
Here's what this piece covers:
- Is strategic sourcing the same as procurement?
- What is strategic software sourcing?
- What is software procurement?
- Why the software procurement process relies on strategic sourcing
- What to include in your strategic software sourcing process
- What to include in your software procurement process
- Critical software sourcing and procurement mistakes to avoid
Is strategic sourcing the same as procurement?
No, sourcing is not the same as procurement. They are related, however.
At a high level, sourcing is about finding appropriate suppliers for business needs. Procurement encompasses the remainder of the purchasing process.
There is often a fair bit of overlap between these two functions. Indeed, in many businesses—particularly smaller ones—a single team may handle both duties.
There are, however, three key differences between sourcing and procurement.
What is strategic software sourcing?
Sourcing is all about looking for suitable vendors, including activities like:
- Selecting and
- Managing suppliers
High-quality sourcing requires a lot of research, as well as a clear definition of sourcing strategy, quality and quantity metrics, and vendor expectations.
Strategic software sourcing streamlines SaaS buying to take advantage of optimal pricing and payment terms. This is achieved by developing a list of preferred suppliers to build strong, long-term vendor relationships. You’ll reduce the number of suppliers you work with and leverage volume pricing and advantageous terms on your software purchases.
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What is software procurement?
Software procurement is the overarching process of buying software for your company. The procurement management function encompasses sourcing, purchasing, and paying for the software you need. While sourcing activities are an important part of the process, sourcing is a subset of procurement.
Why the software procurement process relies on strategic sourcing
Procurement professionals know that strategic sourcing is the key to improving profit margin, reducing lead time, and ensuring strong supplier relationships.
Using strategic sourcing, the procurement department can:
- Reduce costs to buy SaaS software
- Improve negotiating leverage and contract terms
- Mitigate supplier risk by giving preference to known vendors
- Reduce time spent evaluating and negotiating deals
- Improve accounts payable and procure-to-pay functions
What to include in your strategic software sourcing process
Developing a strategic sourcing process places business needs front and center in your search for the best software solutions. Strategic sourcing is an excellent source of cost savings and risk management, ensuring good alignment between the organization and its suppliers.
Critical strategic software sourcing activities include:
- Market research
- A make-or-buy analysis
- Specification development
- An RFQ (request for quote) or RFP (request for purchase) selection process
Identification of organizational needs
Do some research to understand what your company needs to achieve with software tools. This research may include conversations between the procurement team, department heads, and decision-makers. By soliciting feedback from a wide range of stakeholders, you’ll better understand the current state of your tech stack, how active suppliers are performing, and where improvement or expansion is required.
Development of a sourcing strategy
Understanding what your company wants to get from the supplier relationship beyond licenses or services is essential. When developing a preferred supplier list, consider what else the supplier must bring to the table regarding service, support, and alignment.
For each category of software, consider these factors to develop your sourcing strategy:
- Budget and usage parameters
- Non-negotiable contract terms
- Risk management parameters
- Security minimums and requirements
- Sustainability and diversity standards
- Integration needs and potential
- Service-level considerations
A weighted decision matrix may help determine which of the above factors receive priority in the negotiation process.
Shortlist of potential suppliers
Depending on the category, you may have potential providers and solutions in mind. Create a shortlist of suppliers (beyond your favorites) that could potentially provide the required solutions. Conduct some competitive analysis and benchmarking where possible. This can help you get a preliminary understanding of important issues like budget impacts, implementation requirements, and the long-term feasibility of a tool or supplier.
Next, you’ll vet each supplier according to your internal requirements. Say, for example, you’re looking for a new marketing automation platform. One of your requirements is an uptime of 99.8% or higher.
Vetting in this instance will include using a SaaS purchasing platform like Vendr to access buying data on supplier downtime history and removing unsuitable vendors from your consideration set.
Engagement of selected suppliers
With your sourcing strategy and prerequisites clearly defined, you now have the information required to negotiate effectively with suppliers. Knowing your non-negotiables yields a smoother process and better results.
Once you’ve identified suitable suppliers, the question comes down to contract terms like price, delivery schedules, payment terms, and supplier performance guarantees.
Vendr can help here, arming you with the largest data set of SaaS transactions around to strengthen supplier discussions so you can negotiate a better price.
Awarding of contracts and integration
With negotiations successfully completed, it’s time to implement your plan. This is as much about education as infrastructure. Once your list is solidified, you must ensure compliance with the strategic sourcing policy. With a procurement software solution, this part of the process is far easier, as preferred suppliers are integrated directly into the system. Users can then access these suppliers through the curated marketplace.
Implementation of continuous improvement
Your preferred vendor list is a living document, so it’s important to monitor your supplier relationships over time to ensure they still align with your procurement goals and organizational strategy. Creating a supplier evaluation process is vital to the supplier lifecycle. It can help you course-correct struggling supplier relationships and make offboarding suppliers easier when the time comes.
What to include in your software procurement process
Purchasing software becomes a smoother process when you maximize transparency and systematize the improvement process.
Here are six things to include in the optimal software procurement practice:
Formal procurement terms and guidelines
The first step in the procurement process is when the procurement team becomes aware of a need, generally having been notified by a department head or project manager. This typically happens in one of three forms:
- Receiving a purchase request
- Receiving a purchase requisition with an existing contract supplier
- A meeting with stakeholders (when a more complex requirement needs discussion)
If you want buyers to follow company guidelines, it’s important to codify them and educate stakeholders on expectations.
The best way is to create a formal software procurement process that tells buyers how to issue the purchase requisition. It should also outline what information to include in requests, what (if any) strategic sourcing programs are in place, and what department requirements must be met before approval.
A clear approval workflow
Once your stakeholder provides the relevant information, your approval process should be straightforward. Outline the contact and order of departmental approval and provide a system to speed requests through the approval process (e.g. how purchase requisitions are approved and converted into purchase orders and by whom).
A procurement system makes this process easier with approval workflow automation and reminders for approval.
Adoption of supplier performance reviews
Supplier relationship management is an important part of your overall procurement management practice. Regularly evaluating the performance of your supplier contracts reveals areas for improvement and helps ensure that your supplier list remains well aligned with company objectives.
Key contract management activities include:
- Managing contract renewals
- Ensuring contract compliance
- Negotiating price changes
- Tracking performance metrics
- Resolving contract-related issues if and when they arise
Maintaining internal benchmarking also ensures that you continue to pay a fair price for software as the market changes and new opportunities arrive on the scene.
Spend analysis and reporting
Procurement is about saving money but also about maximizing the value of the money you spend. Regular spend analysis and reporting can help your procurement managers make the best decisions for planning and budgeting. It can inform the process of evaluating potential suppliers by giving decision-makers a holistic view of spending and internally benchmarking current suppliers.
Identification of metrics of success
You won’t know the true success of your procurement process unless you measure the results. Set KPIs to quantify the outcomes of your software procurement. Determine which metrics make the most sense to evaluate your process, and commit to regularly reviewing and adjusting as necessary.
Some KPIs you may consider tracking:
- Compliance rate
- Software ROI
- Quality performance
- Cost savings
- Supplier spend
Regular relationship management meetings
The supplier relationship management aspect looks for ways to enhance the long-term relationship, includes regular meetings to report on and discuss performance, and uses risk management protocols to identify mitigation opportunities.
Interested in learning more about the procurement process? We’ve got a dedicated guide on the subject: How to build a procurement process at any stage of growth.
Avoid these critical software sourcing and procurement mistakes
Building a strong software procurement strategy can also help you avoid some of the pitfalls of SaaS buying. Here are three of the most common issues stakeholders encounter when buying a new piece of software.
Buying the first tool that comes along
Software is an expensive and complex investment, and it deserves a healthy level of market research and due diligence.
Commit to the “three bids and a buy” philosophy of SaaS buying. Review multiple RFQ responses to get the best solution and maximize your cost savings.
Negotiating without approval/budget
A procurement process should lead to success from the purchase order to the closing table. Unless you have interdepartmental and finance team approval for a purchase, negotiating for software may be a fruitless endeavor.
Ignoring contract dealbreakers
Contract terms present some sticky areas in buying software. Even if you’ve worked with a supplier in the past or they come with an enthusiastic recommendation, every contract requires careful consideration. Vetting the particulars of your pricing and contract terms can mean avoiding costly mistakes or friction with your supplier down the road.
In particular, pay attention to:
Service-level agreements (SLA): The SLA outlines what happens when things go wrong and your supplier's responsibility for remedying issues. Pay close attention to SLA language and what protections are available as a buyer.
Multi-year or first-year discounting: It’s important to understand exactly how your pricing and service tier are structured and how pricing may change in years two, three, or beyond. If you can’t expect a fair price from a supplier long-term, think carefully before committing.
Product bundling: Many times, software prices are constructed around the concept of bundled purchases. When considering a purchase, ask the rep to explain how the price is constructed and outline what software tools are included. If the bundle rises above your feature requirements, negotiate to de-bundle the deal and right-size the price.
How Vendr can help source, procure, and manage your software stack
Sourcing and procurement professionals in large organizations manage and assess hundreds of potential suppliers, contracts, and procurement needs across any given month.
Use procurement management software to administer the software buying lifecycle and optimize the administration of your contract and supplier management process.
Vendr brings the most important components of software procurement together in one platform, including:
- Pricing and benchmarking data
- Strategic sourcing support
- Contract management tools
- Robust reporting and analysis
- Negotiating support from expert buyers
- Real-time spend management
The process of improving your software procurement and supplier management begins with understanding your current software buying situation.
Vendr’s SaaS procurement solution drives cost reduction initiatives through overlapping spend analysis and price benchmarking. Smart automation like contract renewal notifications streamline the vendor relationship management process, and purchase request workflows ensure compliance with internal regulations.
Learn more about making your sourcing and procurement processes more cost-effective with our free cost savings analysis.