You may have heard about the concept of Lean and how it is applied to manufacturing. The idea behind Lean manufacturing is to eliminate waste. This is achieved by approaches like just-in-time delivery, elimination of unnecessary buffers, and more timely response to fluctuations in demand. This same concept is being used in healthcare, construction, and a variety of different industries. When it comes to IT organizations – and software licensing in particular – the concept of Lean is hardly ever present. The behaviors commonly seen in the IT domain resemble the more traditional manufacturing paradigm of building products to a forecast and stocking them in anticipation of orders that sometimes do not materialize. In this newsletter, we will cover a few tips for minimizing the costs of unnecessary software licenses.
Establish a forecasting process
Forecasting future usage is a necessary part of the conversation with your software supplier – be it SaaS or on-premise – as it gets them energized and interested in doing business with you. The questions to consider are what kind of financial commitments should you make against these projections, and what flexibility do you have to modify them in the wake of changing business conditions? In addition, you should look into the process used to generate the forecast. As in Lean manufacturing, the quality of the forecast is largely dependent on the quality of the process. Unfortunately, in the case of IT, the teams tend to be less practiced at forecasting compared to their manufacturing peers, and are less likely to analyze the impact and trade-offs of a poor forecast. The default position for IT seems to be “do not under-forecast.” This thinking is driven by a few factors: 1) the budgeting process often makes it harder to ask for more money later; 2) the perception that you only get the “big discount” on the initial purchase which encourages people to be overly optimistic; and 3) the fear of being out of compliance if you use more licenses than purchased. (Note: the issue of compliance audits is an important one that we will address in another newsletter soon.) In the vast majority of our consulting engagements, we observe substantial over-provisioning of software licenses which leads to significant waste. This is especially true when someone has had to forecast for a multi-year deployment based on often unrealistic future growth. Vendors are happy to sell you additional licenses upfront, but they will very rarely issue a credit for licenses that do not get used. The good news is that this “shelf-ware”, as it is often called, is completely avoidable. Through prudent negotiations, you can eliminate the need to buy too many licenses upfront and can build in flexibility to respond to changing business needs.
Right-size your usage
Even if you have a perfect forecast in the beginning, at some point reality is going to veer from what was forecasted. Time after time in our engagements, we uncover licenses that are completely unused or only partially used. This is like components in a warehouse stocked but never used to build a product. In a recent cost saving project for a client, we discovered that our client was not only over-provisioned and about to renew their current pool of their cloud storage licenses, but also had purchased all licenses at the “Unlimited” level whereas in reality, less than 10% of their users had demonstrated or expressed such a need. This client’s license type was dramatically overhauled during the renewal that we managed for them due to: (a) a detailed analysis of the actual usage of the licenses, vs. perception of usage by IT leadership, (b) reduction in total licenses resulting from a workforce reduction, (c) reduction in total licenses due to non-usage by some of the employees, and (d) reduction in the unlimited user licenses. The reality is that the licensing landscape is constantly in a state of flux as employees join and leave your company, and as your business needs evolve over time. This is similar to manufacturing where you want to respond to real-customer demand without a lot of wasted inventory waiting for consumption. There are also important steps that you can take in structuring your contract terms and conditions in a manner that provides you with more flexibility to respond to changing needs on a more real-time basis rather than annual renewals. Finally, keep in mind that right-sizing your licenses can take time. Do not wait until you get a notice from your supplier a month before a renewal date. Set some triggers to review important contracts in advance and make sure you do not need to rush through the process.
Eliminate overlapping and competing solutions
Overlapping or competing software solutions are a more pervasive problem as individual departments become their own IT organizations, and therefore select and purchase their own SaaS solutions. This leads to two types of waste. One is that leverage is lost when each department strikes its own deal with competing vendors (or even the same vendor) without collaborating internally. The company’s purchasing dollars are diluted into smaller deals and the economies of scale that drive discounts quickly evaporate. The second type of waste is that there are often two (or more) solutions within the same company or IT organization that can address the same need if provisioned and used to its full potential. This happens when either the full capabilities of the product are not well understood, or if the stakeholders are simply not aware of the current inventory of software licenses that are already paid for and available to them. Leadership changes within the company often bring vendor biases which if unchecked, leads to proliferation of multiple, redundant solutions. This happens more often than you might think. Prior to purchasing a new product or renewing, take an inventory of what solutions you already have in place. Also, reach out to other departments to find out what products are deployed in their environment or better yet, coordinate this dialogue through your IT organization if possible. While we understand that there is sometimes a need to provide autonomy to various departments in a company, balancing this autonomy with working through your IT organization to ensure a united, cohesive approach pays huge dividends.
Be cautious of bundles
We generally advocate that companies buy what they need when they need it similar to “Just-in-Time” delivery in Lean. Bundles are one way companies get you to take more than you can realistically digest in a reasonable time period. This does not mean that you should negotiate the purchase of each group of licenses or modules separately. In fact, doing so causes you to lose leverage. The challenge is to find a way to take advantage of your total business while not getting locked into useless licenses or shelf-ware. Once you commit yourself to a platform, your negotiating leverage is significantly diminished. By using a combination of a defined pricing structure and advantageous contract terms, you can secure your short-term and long-term pricing. For example, a client recently wanted to make a bundle purchase of multiple ERP modules and was being enticed to go this route through a year-end discount offer from the supplier. Optimistically, it would have taken them several years to use the software in the bundle. By the time we finished the negotiation, our client was able to purchase in much smaller increments based on need – a Lean approach. Despite the fact that negotiations extended past the supplier’s year-end, we were also able to obtain an even better discount structure and a modular rollout.
Conclusion
The concept of Lean has spread because it strives to eliminate waste. It is time for IT organizations to begin looking at their software license purchases through this same lens. By taking a more prudent approach to forecasting and consumption of licenses, IT will be able to save significant costs and more closely align licensing with business needs.
Implementing Lean licensing through right-sizing and rationalizing your environment is a key practice area for Symphony. Through this approach, we have saved companies millions of dollars without adversely impacting service levels. If this is an area that you think may yield results for your organization, please contact us at info@symphonyconsult.com for an “Assessment Project”, after which we can give you an estimate of the potential savings.