We live in an increasingly digital world. The vast majority of organisations out there – regardless of their size – are now underpinned by technology. Technology spend is often the largest indirect spending category, and will only continue to grow as companies invest in digital tools to keep up with their consumers’ digital preferences and maintain their competitive advantage.
However, this huge spending category is often ignored due to a priority focus on more visible expenses and organisational objectives. This can obviously have a detrimental impact on an organisation’s financial health if technology spend begins to spiral. However, neglecting technology spend also means negelecting a significant opportunity for cost savings.
What does addressing spend really mean?
What it shouldn’t mean is simply renewing contracts shortly before their renewal date with light touch tactical negotiation. This is transactional procurement and offers little value to the organisation beyond keeping the lights on. Procurement can do more. It can be more to the organisation.
Addressing spend should mean optimising through strategic procurement activity, such as tendering, benchmarking, and strategic negotiation. To enable the time required to conduct strategic procurement activities, a proactive and strategic outlook is required. A detailed understanding of the cost make-up of technology services and solutions and business strategy and objectives is necessary. Once armed with this intelligence, opportunities to optimise may be explored. These can inlude rationalising suppliers, strategically approaching a contract renewal or displacing current technologies with cost-effective alternatives.
But why does it matter so much that addressing technology spend is done properly? Here are 10 reasons why it’s important to strategically address indirect technology spend.
1. Avoid cost increases
Technology is often difficult, complicated and costly to change when compared to other categories. A simple example of this is a software platform embedded into an organisation. It takes a lot of effort to remove and replace this, especially the longer it’s been in place.
If contracts aren’t proactively addressed ahead of time, then – in a best-case scenario – you’ll likely see annual “inflationary” increases. In a worst-case scenario, suppliers could exploit their position – knowing that you require time and resources to exit the relationship – and impose significant cost increases.
It’s important to understand your pipeline of contracts and when these are due to renew. Make sure you give yourself enough time to address them, and to understand the alternative options out there. Once you do, you can leverage this in your negotiations.
2. Ensure that cost-saving opportunities are realised
It’s highly unlikely that suppliers will proactively offer a cost reduction for a contract renewal, even if their underlying costs to deliver have reduced. This can often be the case in technology categories, such as traditional telecoms connectivity networks, where the supplier’s underlying assets to deliver the service have fully depreciated, and more generally where improved processes and technology means that it costs a supplier less to deliver the same service.
There may also be situations where similar services are being provided by multiple providers. These can be consolidated into fewer services from fewer providers, or even consolidated to a single provider. Also, the specific requirements could be reduced with the proper scrutiny and challenge leading to further savings.
Material cost savings are only likely to be achieved through strategic initiatives. These include RFPs or introducing commercial pressure through benchmarking initiatives in order to leverage better negotiation with suppliers.
3. Maximise value from the supply base
Transactional and reactive engagements with key suppliers are unlikely to deliver optimal commercial outcomes. Not only that, but they’re also unlikely to deliver additional value. For example, a transactional engagement is less likely to see you getting the best value out of a product or service. Likewise, you’re unlikely to get better value services such as improved SLAs, consultancy, and training, not to mention general goodwill and collaboration.
Spending more time engaging with incumbent suppliers through proactive engagement will lead to better, more transparent and more fruitful supplier relationships. Not only that, but regularly engaging with the market will ensure ongoing competitive tension and the introduction of new suppliers where appropriate.
4. Keep pace with the market
Technology moves fast, so it’s important to be motivated to keep up with innovation and developments.
A key focus for businesses should be to minimise technical debt wherever possible. This is where outdated technology incurs a large cost to run and maintain. Not only that, but it also inclurs a large cost when it inevitably runs its course. The further behind you fall, the more it’ll inevitably cost you to catch up.
There’s also the impact that lagging behind can have on attracting top technology talent to your businesses. Engineers are leaving university trained on modern technologies, not legacy technology that was in its prime 20 years ago. The more reliant you are on a dwindling resource, the more difficult and expensive the resource becomes to hire.
5. Manage risk
Proactively addressing your spend will help you to identify risks early on. These can then be managed and mitigated by reducing your reliance on a certain supplier. You can do this by introducing a second supplier to reduce dependency, for example.
There are different kinds of risks that you might be facing. These could include a concentration risk with a particular supplier, or a commercial risk due to a lack of price protection at the end of your current agreement. This is why it is key to start negotiations early.
Putting proactive measures in place – such as exploring alternative suppliers, other ways of delivering a particular service, or planning a strategic negotiation to improve contractual protections – are solid ways to negate these risks.
6. Ensure appropriate due diligence and challenge
Approaching your technology spend ahead of time ensures that all relevant parties have ample opportunity to review and contribute. This could include data privacy, cybersecurity, resilience, and other disciplines. All of these departments will have priorities to be taken into consideration when deciding on a new product or service.
This point is particularly important as organisations increasingly look to outsource technology platforms to the cloud, and the resultant data considerations that this brings.
As more organisations move to Software as a Service (SaaS), the hosting and management that would have traditionally been done in-house is outsourced to the SaaS provider. Where this happens, it’s essential that appropriate due diligence takes place. This ensures that the right purchasing decision is made and that effective controls are in place to mitigate potential risks.
Equally important to carry out appropriate due diligence is a collaborative challenge to requirements.
Often a business’s wish list of requirements can outweigh its capacity for change. Therefore, it’s important to challenge associated requirements and the scale of perceived implementation for example. It needs to be a risk-based decision made with all parties fully informed. All all options and alternatives need to be carefully considered.
7. Create better internal alignment and business collaboration
Proactive efforts to address spend will lead to more collaborative and beneficial internal stakeholder engagements, ensuring that all SME knowledge is taken into account.
In order to strategically address spend, procurement will need a thorough understanding of business strategy and objectives, along with different departments’ subject matter expertise in order to effectively offer commercial advice.
A more collaborative approach will also lead to an improved perception of the procurement department all around, being viewed as a strategic partner and part of the decision-making process, rather than simply the team that fulfils an already defined outcome and requirement.
The ultimate outcome should then be that procurement is in a position to put in place more commercially fit-for-purpose solutions that align to longer-term business objectives.
8. Ensure contract terms are addressed
If current contracts are being addressed reactively shortly before renewal, it’s unlikely that key legal terms will be negotiated and appropriately updated; adequate time and leverage is required to do this. Particularly within regulated industries, contracts may no longer be compliant with current regulations or legislation; for example, there are now many more requirements in place surrounding data protection that suppliers will need to adhere to.
These discussions can take a lot of time but can often represent significant value to the business in terms of protecting against operational and commercial risks.
9. Make sure that evolving business requirements are considered
Proactively approaching contract renewals will provide the perfect opportunity to ensure that new and evolving business priorities can be discussed with suppliers.
For example, ESG (Environmental, Social and Governance) is becoming a more important consideration for businesses across all sectors, and as such there is a requirement for organisations to push these obligations through to suppliers.
This can be done through the introduction of ESG clauses with the purpose of encouraging or requiring suppliers to operate to defined standards.
10. Create financial capacity to reinvest
Technology is continually evolving, as are business service offerings and requirements – both of which require continuous reinvestment.
Strategically addressing technology spend will help to create capacity in a business’s budget to spend that money on the organisation’s offerings and objectives, whether it is an improved digital offering, or keeping up with new competitors.
Financial capacity can be created in a number of ways, many of which have been discussed above. There is no one right answer, but organisations will find different approaches to save money and become more efficient in their technology spend if a proactive and strategic approach is adopted.
A final thought
Most – if not all – organisations are underpinned by technology, which makes it a necessary spend line to service business requirements. It can’t be eliminated, but it can be optimised.
Managing indirect technology spend is about spending money optimally and creating the capacity to reinvest where possible, whilst also using that process to manage the inevitable risks that are associated with third-party suppliers.