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Why You Can’t Afford DIY Procurement In A Downturn

Transforming procurement for a software world. CEO and Co-founder of orbit.

From Sequoia Capital announces that “Money is no longer freeTo SoftBank Cut startup investment At around 75%, it’s clear that the growth at any cost mindset that has dominated the startup scene over the past decade is now officially a thing of the past. In their place have arisen capital efficiency and pathways to profitability and sustainable growth.

In short, companies need to do more with fewer resources. Cutting budgets and increasing every dollar can be a pain, but companies that are resilient enough to adapt to this new environment of intense financial discipline are likely to survive what should be an uncertain economic environment for the next 18 to 24 months. But what does “doing more with less” really look like? You could do worse than the Auckland 2002 athletics, as a prime example.

Moneyball It has become a cultural phenomenon for reasons beyond Brad Pitt’s personality. The book and subsequent movie were a huge hit as they brought to life one of the greatest business success stories of the 21st century. Thanks to the innovative work of Bill James, a pioneer in the sabermetric community, Billy Beane and the front office of Oakland Athletics analyzed baseball data in a way that they were able to find value no one else had. The result was one of the lowest “cost-per-win” ratios in recent Major League Baseball history—an example of doing more with fewer resources.

With the global economy facing unrelenting inflation and an increasingly pessimistic outlook, companies are scrambling to cut costs amid an uncertain economic backdrop. Whether it’s a baseball business, a Fortune 500 company or a startup, cost-saving opportunities are there if you know where to look. In the world of procurement, technology spend per employee (TSE) is becoming an increasingly important financial metric to understand because it lies at the intersection of the two largest components of a business: headcount and software spending.

Curbing your own TSE can be a tremendous opportunity, not only by saving money but by reducing the significant opportunity costs incurred with custom, do-it-yourself purchases. Most companies, especially organizations with fewer than 600 or 700 employees, often do not have dedicated purchasing teams. In startup circles, in particular, this function is usually managed by a committee across a mix of finance, IT, and operations. Without a single department owning the process, this indirect spending, which can account for up to 18% of the proceeds In some industries, according to McKinsey analysts, it can spiral out of control. These are the risks inherent in the customized purchasing approach.

Realizing hard and soft cost savings for your custom software procurement may be your most strategic move this quarter, but it should start with a thorough understanding of the risks of this approach.

Hard Costs: Money

Let’s look at the numbers from a hypothetical company while consulting my company’s historical data covering approximately 10,000 negotiations across 2,000+ vendors and over 150 clients. By conducting hundreds of savings assessments, we’ve determined that on an individual basis, companies overpay for programs in the range of $700 to $1,200 per employee. Scope reflects variables such as the total number of contracts, the complexity of the program, and the flexibility of the contracts themselves. In this case, a company with 700 employees could save between $490,000 and $840,000 in just one year on hard costs alone. Imagine a company with 2,000 employees, and the math becomes more compelling.

Without effective purchases, these challenging costs have a way of compounding over time. The snowball effect is a budget time bomb for businesses of all sizes. Another way is offered, when companies leave big savings like this on the table, they put themselves in a corner in terms of layoffs. It is increasingly important to exercise control over the variables of business that can be curbed rather than being at the mercy of businesses hitting the market with bad news on multiple fronts – namely, inflation, energy prices, and the end of “easy money”.

Affordable costs: time and opportunity

Although the soft costs associated with a customized approach to procurement can be difficult to quantify, they can still affect the company’s bottom line and distract from its larger strategic goals. Here’s how:

Employee time and productivity: Based on our interactions with hundreds of customers, we’ve noticed Companies spend four to 12 hours in one contract. With an average of 300 contracts per company, this means that high-level employees can spend 1,200 to 3,600 hours per year on things like contract approvals and negotiations, rather than the more critical work of revenue growth and customer satisfaction.

cost avoidance: Without the right purchases, companies can find themselves buying software they don’t need or use. It happens more often than you think according to the data. Over 83% of companies Tool replacement They are not satisfied every year.

Risk Mitigation: Software supply chains have come under attack in the past 12 months, with cyberattacks targeting software largely 50% on an annual basis. Data breaches can significantly affect customer confidence and the company’s finances. In addition to, 60% of small businesses In fact they close their doors within six months of a major breach.

From dedicated to excellence in software procurement

When you add up all these hard and soft costs, it’s clear that most companies can’t afford a customized approach to software procurement. Instead, recent McKinsey data shows that companies that are able to purchase and improve software and related services at the lowest cost/risk have a distinct competitive advantage and can Reduce costs by about 15%.

It may seem counterintuitive in the midst of a market downturn, but companies willing to invest early in the foundations of what McKinsey analysts call excellence in software procurement — the combination of the right data, tools and resources — are poised to weather the storm and emerge even stronger. And while there’s no one-size-fits-all approach to buying effective software, one thing is for sure: Your customized approach may cost you more than you think.

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