The software procurement process has come a long way since software was mailed on CDs.
Today, thousands of specialized software-as-a-service (SaaS) products offer solutions for almost anything implemented immediately via the cloud. In fact, cloud companies recently saw a record-breaking market cap of over $2 trillion, exemplifying how SaaS technology is moving forward, and fast.
However, the digital procurement process isn’t evolving at the same pace. Many procurement leaders still hold on to traditional procure-to-pay processes. Software is implemented digitally but, in many ways, still treated as the old CD method.
There are a few reasons for the hold-up. Most procurement leaders express low confidence in their change management skills, and others are simply unprepared to choose and implement the right technology for their business.
This can no longer be an excuse. It’s time for companies to transition from traditional buying processes toward digital procurement. Only then can they use trailblazing technology for proactive, predictive, and automated purchasing.
Here’s a deeper dive into how buyers can keep up with the industry and become digital procurement leaders.
What does traditional procurement look like?
Traditional procurement was molded by an IT landscape where product options were limited, and a few vendors dominated the market. Enterprises often first onboarded a vendor and then figured out what products to buy, relying on product suites from a handful of popular companies like Oracle, Microsoft, and SAP.
Since then, procurement has lagged behind other departments and is taking the longest to transition to a fully digitized operating system. Only 15% of companies believe they’re either “best in class” or “industry leader” when digitally transforming their procurement processes and operating models.
A typical traditional procurement process often looks like this:
- A business user identifies a problem to solve, then sends a request to IT.
- The IT team researches available options via Google or visits software-review sites like G2 to understand the vendor landscape and selects based on a list of features.
- The IT team chooses a few different options.
- IT submits expense receipts.
- The vendor renews the subscription, and the company is charged again.
- The process repeats from step 4.
Each of these steps is isolated rather than integrated. For example, the IT team is responsible for vendor selection. Once IT has its recommendations, it hands off the process to the procurement team, who then makes decisions based on cost and business needs. Technical and business requirements hardly align in this process.
Once IT picks a tool, traditional procurement teams only focus on getting paid, not optimizing their tools’ value. They also don’t measure consumption or track return on investment (ROI). Worse, the IT team is no longer involved at all and may not even know about the purchase for months.
What’s changed? The winds of SaaS
The SaaS world changed significantly while procurement methods lagged. In particular, the move to the cloud disrupted the way sales, marketing, engineering, and all other departments manage their day-to-day work. More than $1.3 trillion in enterprise IT spending will likely shift to the cloud in 2022 – a number expected to grow to $1.8 trillion by 2025.
With this shift, the way companies buy digital tools is also changing, and lately, they’re buying a lot. In 2021, companies worldwide used an average of 110 SaaS applications. Purchasing today faces completely different challenges than it did five or ten years ago.
Here are three ways SaaS helps mitigate procurement challenges.
1. SaaS is now decentralized – anyone can start using an app
Buying software is no longer a centralized IT decision. Every other team in the company can easily research, test, and buy products online. Rather than waiting months or years for IT to decide on a vendor, select integration partners, and implement solutions into their tech stack, teams can choose the tools that meet their unique needs.
Decentralization also comes with unexpected consequences, such as the proliferation of shadow IT, where employees make purchases IT doesn’t know about, are off-the-shelf, and never used.
2. No more vendor bundles; it’s all about best-in-breed products
Rather than choosing additional tools based on your vendor’s limitations, buyers now select from hundreds, if not thousands, of best-in-class products to fit their needs. The popularity of plug-and-play software and ease of implementation has led to an explosion in SaaS purchases and usage.
The competition is fierce, so providers no longer hide their pricing plans from their websites. They need to be very transparent about their functionality, features, and security measures.
3. Freemiums, premiums, and more: everything is a subscription
Digital procurement software has an entirely different contract and payment model than traditional procurement. It’s called the subscription model. Instead of on-premise solutions, procurement can buy and own, typically with a maintenance contract.
Subscriptions offer flexibility. Procurement can decide when to change vendors based on how much value they deliver instead of focusing on the sunk cost. This enables companies to stay nimble, especially with month-to-month subscription agreements. Companies can move quickly to another platform rather than pulling out of an entrenched legacy system.
Subscriptions can also be quite problematic. Anyone can create a seven-day free trial, but that doesn’t mean people actually use the account. It’s easy for an employee to purchase on behalf of their company and then exit the tool and forget their contract.
We typically see this with freemium business models. Procurement should be wary of “free” trials that require buyers to enter credit card information before activation. Businesses can commit to a subscription contract for a month or even a year.
How is digital procurement different from traditional procurement?
Now procurement teams are faced with two choices: either acknowledge and adapt to the new digital procurement methods or stick with the old traditional methods, which no longer make sense.
Here’s how you can make the right choice.
Digital procurement complements the new SaaS buying process. A good digital procurement platform creates a central place to monitor every application and subscription.
Vendor management lowers overall costs and helps determine which tools offer the right value for their cost and can be removed entirely from the tech stack. It also helps consolidate data across the organization so leaders can analyze how tools interact with each other across their technology stack.
Modern procurement also sees decision-making repeating itself month after month and year after year. You can think of almost any subscription renewal as an autonomous purchasing decision.
The result? Smart buyers who want to optimize their spending at every stage of their buying journey. Digital procurement also mitigates risks stemming from what we call “rogue digital procurement”.
The risks of rogue digital procurement
While purchasing SaaS tools is easier than ever, it can become somewhat free-for-all without a digital procurement platform.
Employees can implement SaaS tools themselves at the click of a button – all they have to do is accept the terms and conditions (which, of course, most of us read in full, right?). This can pose security risks and generate hidden costs, also known as shadow IT and dark billing.
Shadow IT is software purchased without the involvement of the IT team. With so many SaaS tools available and without a central SaaS management system, shadow IT can quickly accumulate, creating significant risk for the company. This means the money goes out the door undocumented, leaving organizations vulnerable to security breaches.
Decentralized SaaS purchasing further makes it even easier for shadow IT to sneak in. Centralized teams usually buy tools like Google Suite, Slack, Zoom, and payroll providers. But the employees directly purchase hundreds of other tools that don’t undergo compliance checks before being integrated into the rest of the tech stack.
This exposes organizations to regulatory and security compliance risks. Many tools don’t comply with data privacy policies, such as System and Organization Controls (SOC), the General Data Protection Regulation (GDPR), and the Health Insurance Portability and Accountability (HIPAA).
Even if these regulations are not relevant to a specific solution, employing non-compliant solutions puts a company at risk of data leakage. Furthermore, employees can leave behind orphaned applications when they leave the company. Or worse, they still have access to these applications.
All of this points to the need for a digital procurement management tool.
SaaS waste is another major problem for companies without a centralized procurement process and system. This can lead to hidden expenses through dark billing patterns. With many technology vendors sticking to aggressive annual business metrics, such as increased net dollar retention, they resort to questionable billing practices to meet annual goals, including:
- Not informing customers when a free trial converts to a paid account. A credit card is usually required when signing up for a free trial in hopes that users won’t miss the deadline and automatically switch to a paid account. The conditions accepted for using the trial version often make it impossible to withdraw from the contract.
- Silent and recurring transactions. Most SaaS providers sell subscription services that require monthly, quarterly, or yearly upfront payments. While they should notify customers each time an upcoming charge is pending, they often don’t send any notification. These fees can go undetected if businesses don’t verify their bank and credit card statements.
- Prorated billing. With subscription services, companies agree in advance that they will, in any case, pay a minimum amount for the year. Subscription can be based on licenses, API calls, or data consumption. If the company doesn’t use all of the units purchased, it still has to pay for them. Also, they have to pay additional fees if they exceed the contracted units.
Why you need a digital procurement platform
A digital procurement platform ties traditional procurement to the modern SaaS world. It provides an overview of all purchases, tracks usage to determine which tools are valuable and when they need to be trimmed, and provides a central location for enterprise teams to securely manage and view all SaaS tools.
With a digital procurement platform, you can optimize every aspect of the procurement process, especially in the following four areas.
Most companies adopt optimized tools for their daily work or fully switch to them. Proper sourcing and cost management is the next step. Process automation software helps streamline your procurement tool stack by tracking all costs, purchases, and suppliers, and reducing the manual work associated with orders, approvals, invoicing, and more.
One of the most disorganized aspects of large-scale procurement is spending oversight. Businesses can optimize their costs with an up-to-the-minute view of the money spent and budget available, reducing redundant systems and contracts.
One of the easiest ways to optimize costs is tracking software consumption. Modern financial leaders treat every expense as an investment and measure usage and results. Don’t be surprised if more organizations start tracking how many Zoom meetings are held per paid license!
Centralized procurement tools make companies more flexible in purchasing by offering predictive and proactive sourcing. Most importantly, organizations can better partner with their vendors to fund strategic investments that move the business forward rather than deploying point solutions across the enterprise.
As businesses grow, centralized procurement can become an obstacle, slowing teams’ ability to purchase and implement strategic systems. A procurement management platform can support teams through the procurement process while meeting policy and budget requirements. By freeing up staff and moving away from tedious approval workflows, companies can focus on what really matters – the work itself.
How to set up a successful digital procurement process
By now, you know what the modern procurement process looks like. But where and how do you begin? Here are some best practices to help you shake off traditional CD sourcing methods and become a digital procurement expert.
1. Prepare in advance
Businesses can keep track of all digital purchases with SaaS spend management platforms. These platforms can support three specific areas:
- Software license management: Monitor user license adoption and consumption metrics for each SaaS provider. Know when a tool is used or wasted.
- Software vendor management: Instead of bringing in SaaS vendors only during a problem, such as overage charges or acceptance issues, build a strong vendor relationship that will help your business get the best prices, leverage all features, and seamlessly renew your agreements.
- Software spend management: Control costs and plan for strategic investments. IT centralizes spend management for every software connected to your technology stack, making it easier for different business units to buy what they need.
2. Assess your current SaaS spend
The next step to successful digital procurement is auditing your existing technologies. Find out what your teams use with these steps:
- List your applications.
- Identify new applications since you last checked your tech stack.
- Track logins and usage. For example, the licenses and functions used.
- Measure changes in logins and activity over time to determine each application’s value.
- Plan and visualize software renewals to identify where cancellations or downgrades can save money.
3. Involve the right stakeholders
Digital procurement cannot take place in isolation. It’s important to have stakeholders from each team involved when deciding the tools to buy, how much to buy, and whether to renew your agreement. These stakeholders are:
- CTO or CIO
- Procurement team
- Finance team
- Legal team
- Department leaders
- IT manager or SaaS manager
- End users for validation
4. Prioritize contract negotiations
You can purchase digital products in two ways. The first is click-through agreements, and the second is contract negotiations. Click-through agreements don’t offer concessions on prices, fees, payment plans, or security commitments.
By negotiating a contract directly with a vendor sales representative, organizations can validate compliance requirements, secure rebates, and mitigate data breaches and indemnity.
Adapting to the SaaS world
Traditional procurement processes are no longer compatible with the cloud-based SaaS world. Forward-thinking leaders can take full advantage of the best proactive and predictive technologies by moving away from outdated, unregulated procurement to digital procurement.
After all, we live in a world of endless SaaS solutions and tools with incredible potential for growth and problem-solving. It’s time for procurement methods to catch up.
Is software spend burning holes in your wallet? Find out why companies struggle with software inventory and avoid overspending on SaaS products.