Between budget cuts and complex contract language, managing IT spend and relationships with software vendors can prove to be quite challenging, especially if you’re not in a position with leverage. With new technology constantly being introduced to the market, best-in-class procurement teams understand the importance of being in a position with leverage – allowing the business to be in control of the vendors’ influence and the ability to evaluate alternatives. In striving for healthy software supplier relationship management, the themes to aim for are, on the surface, rather simple: transparency and predictability; competitiveness; and value proposition.
Say for example, you are coming up on a renewal with a Software as a service (SaaS) supplier that is used by a large employee group. The current version has multiple add-on features that are required for the user base to successfully utilize the tool. Now, like a great ‘strategic partner,’ they are ready to start talking renewals 90-days out from the renewal date and their initial proposal is 15% higher than last year because of Consumer Price Index (CPI) increases and ‘enhancements to the software.’ However, like the previous renewals, the pricing of the licenses does not break out the standard license costs and the mark-ups for the add-on features. Additionally, you’ve had this supplier for over five years now and because the relationship has been going so well, you haven’t spent much time focusing on the value they are providing your user base.
Now is the perfect time to consider:
- Is the pricing for the software and features transparent so that you can delineate the areas of spend with ease?
- Is their pricing proposed still competitive with the market?
- If you needed to benchmark against the market, are you confident that you could do so accurately to ensure it is an apples-to-apples comparison?
- Do you feel that the software is providing the best user experience to your user base or could an alternative supplier improve that?
If you’ve answered “Yes” to all of the above then congratulations, you can stop reading this article.
However, more often than not, suppliers that are heavily relied upon within the business tend to remain in place for ease and business continuity. This is not necessarily because they are providing the best value—which brings us back to those core themes for managing software spend and suppliers: transparency and predictability, competitiveness and value proposition.
Transparency and Predictability:
Whenever you are dealing with a pricing proposal from a supplier, you need to make sure that all pricing and licensing detail are clearly explained. Predictability refers to scaling the licensing to meet growing user-base needs and the ability to understand the financial impact. Specific to software pricing you should know:
- The type of license being purchased;
- The cost of the associated license;
- Whether there are additional features included in that cost;
- The associated costs with those features; and
- Whether you have the ability to select additional features based on your user needs
If the spend is transparent and predictable, you will be able to measure how competitive your current supplier is with the market. Knowing the current license structure and having pricing in place is crucial for an apples-to-apples comparison of services during the sourcing process. Competitiveness is important regardless of the relationship with the supplier. As the customer, you have the right to check the market to ensure pricing and services are aligned with the needs of the business. It allows for a healthy balance for the supplier relationship to ensure that the decisions are based on what’s best for the business and user base.
To maintain a positive relationship with the incumbent vendor, keep an open dialogue with them about your go-to-market activities and allow them to bid as well. If they are confident with their pricing and value proposition, they should welcome healthy competition to re-affirm their position as the “top supplier.”
When evaluating the scenario described above, this piece relates to the ‘strategic partner’ and enhanced features (Remember that 15% uptick in pricing?). Not all companies define value-adds the same. Begin by defining what ‘strategic partner’ means to your organization. For the sake of our example, let’s describe a ‘strategic partner’ as one that helps the user base identify gaps in the software and provides recommendations or configurations to improve the user experience so they can get the most value out of the solution.
As a ‘strategic partner,’ they may justify the price increase by the enhanced features that are integrated into in the solution. These enhanced features sound amazing but have they taken the time to showcase how these will directly correlate to improving the instances for your users? Have they provided any ROI justification? It is important to question the supplier on these because if those enhancements are improving areas of the software that are under or not utilized at all by your users, why should you pay for that?
The focus should be around how your suppliers can deliver increased value to your organization while also remaining competitive with the market.
By incorporating the described themes into your supplier management you secure leverage. Leverage is key in all supplier relationships and it is crucial that the customer maintains it. If the customer described in the scenario had required the supplier to present transparent and predictable pricing, they would have been able to test the competitiveness of the solution and determine the value proposition of the supplier with full confidence before running into renewal issues. Having a clear understanding of the competitive rates related to the product you are purchasing and understanding the value proposition you require from the supplier will enable you as the customer to have enough leverage to successfully source the product and make the best decision for your business moving forward.