During the recession of 2008, one of our clients, a midsize enterprise with 6,000 employees, suddenly realized that a 25% revenue decline was on the horizon. Their CIO wanted to swiftly and quickly reevaluate the IT spend, eliminate waste, renegotiate contracts, rationalize new purchases, and determine how to right-size upcoming renewals. They called us to lead this effort, in close collaboration with the internal IT organization, and in a manner that would not damage supplier relationships. In a matter of three months, we were able to significantly reduce their spend (primarily in software and services) while still preserving their key vendor relationships.
Recent market conditions suggest that we are once again facing turbulent times. The current downturn may be temporary until the COVID-19 virus has been contained or eradicated, or there may be lasting effects for a longer period of time. This means that you will need “flexibility” to scale up and down on short notice and as needed.
As an IT professional, you may not be fully aware of what is fixed and uncontrollable vs. what is variable and flexible. Vendors sometimes tactfully leave you with the impression that a deal is set in stone but experience tells us that you can negotiate especially in times of uncertainty. In this newsletter, we will cover a few tips for analyzing your IT spend portfolio in hopes of gaining efficiencies and reducing cost.
Pareto your spend through a detailed spend analysis
Since the majority of IT non-labor spend tends to be associated with a small number of vendors, following the 80/20 rule is a good place to start. Using Account Payable (AP) reports or contracts data, you can develop a ranked order list of IT spend to highlight the areas of opportunity. The next step is to extract the key metadata associated with these contracts and populate a spend analysis sheet. This can include things like contract term, renewal date, annual spend, auto-renewal clause, termination for convenience language and fees, and for software, all license entitlements (e.g. on-prem and SaaS). Cluster contracts associated with the same vendor. In cases such as Salesforce, for instance, the number of vendor products is generally small. But with some ERP vendors like Oracle and SAP, there may be dozens of products that you will want to assess. Identify which vendors are critical to your business (performance, critical capabilities, enabling technology, etc.), and which ones are not. Through this whole process, you may find that you consolidate spend with a few critical suppliers and others may disappear from your landscape altogether.
Understand your software entitlements vs. usage
We often see a disconnect between the license entitlement a company buys and the license counts they use or deploy. Sometimes they have unnecessary “shelf-ware” and other times they are using licenses well beyond their entitlement. Either situation can be very expensive.
There are several forces that contribute to this problem. At the time of purchase, everyone is optimistic about what can be deployed and software vendors often give incentives, in the form of discounts, to over-buy. Once a purchase is made, and the work shifts to the system administrator, the emphasis is on making sure licenses do not run out. In other words, there is less emphasis, and fewer tools in place, to routinely assess and harvest unused or under-utilized licenses. Finally, there are many forms of an “all you can eat” type of license structure that are promoted by software vendors. This creates a complacency in the management of the licenses which potentially becomes very expensive to unwind or rectify before the next renewal. All of these issues can be mitigated by having a clear understanding of your complete license entitlement and an understanding of your usage.
Right-size your license usage
By digging into the details of what was purchased and where you are underutilizing assets, you can create the foundation for a re-negotiation of your license entitlements. In a recent engagement regarding a Salesforce contract renewal, we asked our client to determine how much of the licenses they purchased were actually deployed. Their impression was that nearly all licenses were deployed to users with little to no waste. As we probed further, it became apparent that based on a “90-day login” report, nearly one third of the licenses were no longer in use. In other words, they needed approximately 30% less licenses than they had purchased and could throttle back their renewal quantity by this amount.
In the case of ERP solutions from Oracle and other software vendors, there may be dozens of product line items, with each one scrutinized and evaluated for usage. In one engagement, our client had deployed a full (and expensive) procurement license to a large number of users across various departments. As part of our analysis, we realized that the full-blown license should have only been deployed to the procurement department responsible for the lifecycle of a purchase order. Management, as well as other departments, only needed the ability to view and approve a PO, which could have been satisfied with was a lower cost license type.
We had a similar story with a client involving Docusign. The client had optimistic views about the adoption and usage of Docusign envelopes. They were about ready to renew their contract with the same counts. By analyzing usage and changing some terms, we were able to cut 25% from their renewal cost.
Assess your compliance and audit exposure
Software companies increasingly rely on audits to generate incremental revenue. Some vendors can contractually back-charge you, with inflated prices and penalties, for use beyond your entitlements. Depending on the vendor and the terms of your contract, they may also require your company to pay for the audit, which can add up to hundreds of thousands of dollars. As such, over-deploying licenses beyond your entitlements can be an audit risk with financial exposure that can be material to your organization. This exposure is hardly ever budgeted and can drain the resources you had set aside for other valuable initiatives within your organization. This subject is described in further detail in our newsletter entitled “Software License Audits: Prevention and Response”.
The key in all of these situations is having a complete picture of what you have purchased and what you are using. Once you find the opportunity, or threat, you need to find the leverage to move the deal in the direction you want.
Get your vendor’s attention and take action now
Every situation is different, but you need to find a way to get your vendor interested in talking to you and taking action. If you are going to save money, it has to come from somewhere. How do you make it in the vendor’s best interest to work with you? In some cases, you can use the promise of future business to entice them. In other cases, you can use the threat and opportunity of supplier consolidation to get their attention. We worked with one client that had five different BI (Business Intelligence) solutions scattered throughout the organization. By letting the vendors know that we were looking to consolidate, they were much more willing to be flexible about existing contracts and were ready to offer a more competitive solution to win the broader footprint.
Another way to gain extra leverage is to adjust timing to align with a critical supplier deadline like fiscal year-end. If you are willing to renew early and start a new contract, you may be able to get the supplier to give you extra concessions in pricing and/or contract terms. That was the case when we helped a client negotiate a SaaS contract before the end of the contract term, effectively swapping unused licenses that were purchased as part of a bundle, and applying the value toward growth of existing licenses.
Conclusion
During these difficult times of economic downturn, it can become daunting to deliver large savings to the organization while still maintaining operational excellence. In order to get quick results, you need to analyze your spend and get insights on the best opportunities. From there it is an exercise of digging into the details, interpreting contracts, understanding usage, and applying benchmarks. Once you have the details, the art of the process comes in finding and exploiting your leverage to drive an advantageous deal.
In our practice, we have a long track-record of helping clients save millions of dollars on their key vendor contracts without negatively impacting service levels or compromising the relationship. If you think we can be of assistance, please feel free to contact us at info@symphonyconsult.com.