Spend Matters welcomes a guest post from Duncan Jones, Vice President and Principal Analyst at Forrester Research, serving Sourcing & Vendor Management professionals.
In a recent Forrester survey of procurement professionals, the top two priorities for 2013 are:
- Becoming a more strategic partner to my business colleagues
- Exceeding my cost reduction targets
That second priority happens to be the third most common New Year's resolution, which is to spend less and save more. The most common is weight-related, with 38 percent of Americans last year having made some kind of resolution about their weight.
Procurement professionals are particularly susceptible to weight problems. Their obsession with price often leads to overeating. When they eat out, they tend to choose the super-size meal or family bucket over the basic alternative because it offers them a bigger discount. "These extra fries represent a 20-percent saving," they would say.
I see the same behavior all the time in software deals. The sales rep bulks up the deal with products the buyer doesn't really need and more license capacity than they can currently consume, and then persuades the buyer to agree to this by offering a great-looking discount. Buyers who only look at whether their discount level beats some spurious "market benchmark" too often end up with I call a "great price, bad deal." Sourcing executives who measure their teams primarily on their ability to negotiate lower prices are incentivizing their teams to go along with what the sales rep wants them to do (that is, buy shelfware), rather than encouraging them to secure the best overall deal for their company.
This misguided obsession with market price benchmarks not only wastes money on shelfware but also leads to poorer outcomes that can cause problems years down the road. Software companies that have already banked all of your money have less incentive to ensure the success of your project. For some of them, you can't even stop paying maintenance on software that you've never used.
So how do you pick the best deal for your organization rather than the one that the salesperson wants you to pick? It is not easy to look beyond the headline discount percentage because attributes such as flexibility and risk mitigation are harder to measure. But you can do it and thereby make a better choice, if you evaluate the following:
- Long-term total cost of ownership (TCO), not just the immediate order. A license discount may not be a TCO saving if it causes you to pay maintenance prematurely. Even if the there is no competition for this order, you should still be able to persuade the supplier to give you alternative proposals so you can compare the big deal that the rep wants you to accept with a series of smaller purchases over a longer period.
- Flexibility to adjust costs if circumstances change. Calculate the TCO under different scenarios so you can compare the value of holding on to your money with the discount you would get by committing everything on day one. The business case may contain optimistic estimates of timing and benefits, but what is the impact if the reality is not as good? Model the likelihood and financial impact of more pessimistic scenarios so that the decision-makers can see the value of insurance and risk mitigation. A flexible deal may cost more than an unconditional purchase, but that could be a price worth paying.
- Risk mitigation, in terms of the contract's adherence to your standard template. Experienced sourcing teams build a library of acceptable clauses that address the important elements of a software contract. Analyzing how closely each clause adheres to your ideal model will enable you to give the contract an overall risk mitigation score at the start of the negotiation process and then to measure the extent to which your buyer succeeds in improving it prior to signature.
Bottom line: Make a New Year's resolution to stop technology vendors from super-sizing your buyers. Start building a holistic deal assessment framework that measures flexibility and risk, in addition to price, and use it to measure your buyers' performance. Track the cost of previous mistakes. Resist the temptation to hide past errors, such as claiming savings that turned out to be shelfware or additional license costs you've incurred by failing to review the contract thoroughly. Learn from experience, whether it is yours or your predecessor's, and use it to emphasize to your peers the need for a more balanced deal evaluation method.
- Duncan Jones is a Vice President, Forrester Research