The role of the CIO is changing.
IT sourcing, IT procurement and vendor management leaders are becoming increasingly important as they represent the critical link between organizations' internal capabilities and the external digital business ecosystem- providing a strategic edge- and they’ve never been under so much pressure. Operating in volatile commodity markets, political landscapes and rapid technological change, procurement leaders are increasingly looked to deliver business value in an agile way, and to ‘do more with less’.
The 80/20 Rule
With the rapid pace of technology driving incredible organisational change, finance leaders and CIOs are taking the time to invest in strategic relationships, such as setting up quarterly business reviews with their highest spend vendors. But there's not enough time in the same to build vendor relationships when you own 100++ SaaS products. So, CIO's and IT teams must prioritize based on importance or find another way to maintain close vendor relationships (ie: working with a fractional buying service). When it comes to optimizing the supply chain it often makes sense to focus on the areas where the largest impact can be felt, namely the largest spend categories and the top contracted suppliers. Using the ‘Pareto principle’ isn’t uncommon, namely, focusing on the top 80% of organizational spend, spent with around 20% of vendors.
But what about the 80% of your software vendors? At a high-growth company, this likely represents 100-200+ vendors, and likely, millions of dollars of spend.
Procurement and finance leaders weigh up the cost and benefit of managing tail spend- with data silos, misaligned teams and ‘maverick purchasing’ to contend with, the 20% can be perceived as too much effort for too little reward. However, tail spend represents a significant cost for high growth companies. While comprising a relatively small portion of total cost, the drip-drop accumulation of spend by large numbers of small, non-strategic suppliers making ad-hoc and one-time purchases adds up to represent a sizable sum. For hyper-growth companies, it’s a challenge to keep up as the company scales, and what was once a small amount of spend outside of the skill of procurement can now amount to millions of dollars.
In any improvement to the bottom line, it is first critical to realise the scale of the problem. A full review of suppliers provides insight into the tail spend. Spend management tools, such as Intello.io, Blissfully or Zylo enable organisations to gain full visbility, and can reveal hidden tail spend. Hidden tail spend is described by Accenture as spend with big suppliers not covered by contracts—e.g., because existing contracts do not cover the specific materials/service being purchased, or simply because of “noncompliant” purchasing. Companies can conduct this review and then search for underutilised tools, streamline, or spot duplicates. Then, the IT team can shift spend towards preferred suppliers and begin to take action to reduce the number of products within your stack.
Supplier consolidation and reduction makes it easier for processes to be aligned and streamlined across all aspects of the business, from supply chain to finance. Compliance and demand management can be improved across the supply chain by addressing issues in the supply chain and P2P process, including ensuring early intervention for invalid requests in the requisitioning process and early visibility of new demands. This will help to prevent new vendors being created outside of existing contracts and allow preferred suppliers to manage demand more effectively. However, there are often valuable tail spend suppliers, which is why it can be beneficial to work with an outsourcing partner to manage the buying process, freeing up internal resources to do what they do best, and be removed from a task too irregular for them to gain expertise or efficiency.
Your relationships are your competitive advantage
We all agree that relationships matter. And within your IT stack, it is critical to constantly find opportunities to improve your partnerships. Intuitively, in house vendor management has certain merits, as it can enable consistent oversight to multiple agreements. Increasingly, however, mature and hyper-growth enterprises are engaging third-party specialists to manage the day-to-day oversight of transactional activity and collection of operational data related to vendor management. By outsourcing the management of their suppliers, clients are able to reduce costs, improve service delivery, and focus their internal resources on developing richer relationships and strategic value- making those relationships richer.
The industry is seeing movement towards long term strategic partnerships based around business values. Recent strategic partnerships seen by the likes of Salesforce and IBM under the spotlight of the ‘ethical use of technology’ movement embodies the shift. It can be beneficial, therefore, for negotiations to be based on wider business value unencumbered by the strain of purchasing processes.
Do what you do best- and save money
For IT teams at a fast growing company, your world is becoming more complex. You're constantly adding more products to your stack and your annual spend continues to grow linearly--because most of your contracts are licensed-based, meaning they are correlated to your headcount. IT vendor governance is increasingly becoming more complex as more services and vendors are added to a firm’s vendor portfolio. Ensuring these vendors’ efforts and performance are aligned collectively with overall business expectations can be extremely challenging. As businesses rely on the collective performance of the portfolio of vendors providing outsourced services, the importance of delivering on expectations becomes essential. Many of today’s internal vendor management functions have not been designed or equipped to handle this sort of change or complexity.
Most companies don't realize that outsourcing SaaS vendor relationships can provide material savings. First, outsourcing this function will give your IT team a significant portion of time back in their day (Up to 25% of IT's time is spent on the phone with software vendors). Secondly, by having an extra set of eyes on the vendor relationship amongst your tail-spend, cost efficiencies will pop up. Outsourcing vendor management to a third party is also more likely to drive the process standardisation and consistency required to enable the transparency essential to effective governance. Any single contract for IT or business process services is characterised by a wide range of recurring commitments, deliverables, and obligations. By simply harnessing economies of scale, vendor management experts can streamline and improve these processes, working with suppliers every day. With 25% of internal IT’s time being spent on vendor management, working with an outsourced provider provides significant cost and time savings.
There’s no denying that contract and vendor management is difficult. IT vendor governance is increasingly becoming more complex as more services and vendors are added to a firm’s vendor portfolio. Research about the average day of an IT manager when working with finance or procurement is spent doing tasks that take away from their core capabilities, reduce overall employee satisfaction and increase churn, losing valuable skills that are difficult enough to retain in today’s shifting expectations towards work-life blend. Companies operating at scale use hundreds of software products. That means your team is spending weeks on sales, customer success, and renewal calls- when they would rather be coding, being challenged, and working on their career roadmap.
Look to the future
Outsourcing SaaS buying and renewal management may be a wise option if the outsourcing environment is evolving faster than the vendor governance can manage, the business does not have adequate time for vendor governance to catch up, and the organization recognizes the need to relinquish short-term control of vendor governance. Organizations can ask several important questions to independently gauge the potential fit of an outsourced vendor governance option.
- Is my business spending significant amount of money on outsourced technology services, progressively moving towards the cloud?
- Am I operating in a hyper-growth environment which would benefit from allowing employees to operate with agility?
- Am I ready to experience the freedom of vendor management via a third-party buyer? (Outsourcing doesn’t result in lack of control over compliance)
If your answer to any of these questions is ‘yes’, you may benefit from exploring outsourcing. As procurement is gaining more strategic importance within an organization, the expectations from this function are also increasing. This year, procurement function will continue to deliver on traditional cost savings while focusing heavily on digital technologies and supplier synergies, and working with a purchasing and renewal management service provider.