Procurement’s biggest headache isn’t inflation, or supply bottlenecks, or even talent shortages. It’s a mega-category that touches by every business function and is growing exponentially every year with poor oversight and little-to-no pricing transparency. We’re talking, of course, about software — what one senior director of IT sourcing at a Fortune 500 retailer called “the silent killer of your company’s budget.”
More than 11 years after Marc Andreesen’s famous declaration, software is still “eating the world” and has morphed into the backbone of many modern businesses who rely on cloud-based software to tackle mission-critical work.
The intersection of traditional procurement and the modern SaaS explosion has created a slew of opportunities and challenges that modern business leaders — most notably in finance, procurement and IT — are increasingly attuned to as technology spend has grown into a top three-line item for most companies.
The Spend Matters analyst team recently released a new report titled “Sourcing Software The Right Way” that explores the complexities and importance of effective software procurement. One of the biggest takeaways from the report: “Procuring software well is critical to business operations now more than ever.”
Why it’s so hard to buy software well
There are many reasons why it’s difficult to buy software well, and one of them is that traditional procurement hasn’t evolved quickly enough to accommodate the nuance and complexity associated with modern software. Procurement technology has undoubtedly made progress over the last decade but most of the tools and applications on the market are still inherently designed for a hardware-first world.
Buying software — that is, a service — in the same way you buy goods leads to misuse of company time and resources. Managing services require competencies that differ from goods and hardware procurement. Goods and hardware have a different set of sourcing requirements and rely more heavily on cost analysis, category-specific knowledge and relationships between suppliers. Other factors at play include:
Sellers know more than buyers. Due to the lack of technical and engineering knowledge amongst the procurement specialists sourcing the software, organizations know much less about how to negotiate costs of software and could propose costs out of step with market rates.
Software is constantly changing. The software market is incredibly crowded and constantly changing. Products are continuously modernizing to address current and future needs. Prices and company models are also regularly revised which makes it hard to know if you’re buying the right product.
It takes a village to buy well. When buying software, multiple cross-functional approvers that include finance, ITSEC and legal are needed. Siloed purchasing functions can often prevent the flow of information needed for an effective vendor evaluation.
These factors have created unnecessary spending and waste, both of time and resources amongst businesses, with the average company wasting nearly one-third of SaaS software expenditures on tools they no longer want or need.
Software procurement excellence is becoming a thing
There are a handful of seemingly simple questions that finance, operations and IT executives should be able to answer about their tech stack. Questions like are we buying the right tools, are we paying a fair price, are we using the tools we’ve bought and is our buying process efficient and compliant?
These are some of the questions McKinsey and Company set out to explore as part of a report on software procurement excellence earlier this year. The analysts studied 150 companies from a wide range of industries and sectors and found that companies who can procure software and related services at a minimum cost/risk have a distinct competitive advantage.
The report explains that “for many organizations, indirect procurement … is a source of tremendous untapped value and savings.” It found “that companies able to optimize their indirect procurement can reduce costs by about 15%, translating into an approximate 1.5% bottom-line improvement. More importantly, some companies have been able to transform their software procurement function into a strategic, value-generating arm of the organization.”
So how do you achieve software procurement excellence? What are the ingredients and infrastructure required to develop a world-class software burying organization? According to McKinsey, there are four critical components:
- Market intelligence: High-performing teams also develop and maintain knowledge of the software market and its suppliers.
- Tighter collaboration: As purchasing workflow complexity increases, better processes must be created for navigating them.
- Better use of tools: Procurement teams now have access to large volumes of software-project data and analytics technologies.
- Empowered organization: Teams that are centralized as a core competence have a critical role in driving the process, and therefore the outcomes.
Regardless of your business objectives, one thing is becoming increasingly clear: buying software well is really hard. But you don’t have to go it alone.
To learn more about Tropic and software procurement excellence, visit Tropic.