The significance of establishing strong and robust relationships with vendors and implementing a standardized process for procurement cannot be underestimated.
With only 14% of procurement leaders confident in their talent’s ability to meet future requirements of the function, the need for best practice and digital upskilling is critical now more than ever. Equally vital for an organization is to adopt a vendor management approach that sees proactive purchasing and partner selection as strategic decisions to the business process and not just tactical to the existing requirements.
The right combination of principles and tactics can optimize an organization’s vendor management and procurement strategies.
NAVIGATING DIFFERENT MODELS
Vendor management and procurement have always played a crucial role in ensuring the success of an organization, lowering costs and maximizing potential at the same time. With the advent of software as a service (SaaS) models, the traditional approach to vendor selection and procurement has undergone a significant transformation.
In 1999, Salesforce transformed how technology providers went to market when they built their solution from scratch, with SaaS in mind from the start. Buyers sometimes still invest in tech with heavy capital expenses, but they face additional overhead costs for support, warranty, and maintenance services. This traditional model often results in unpredictable expenses, limited visibility into total lifetime costs, and a lack of flexibility for buyers.
The introduction of SaaS models has shifted the power dynamics between vendors and buyers. With a SaaS model, customers have the flexibility to switch vendors if they are not satisfied with the service provided. This has incentivized vendors to focus on delivering value-added services to retain customers and create stickiness with customer success organizations. From a buyer’s perspective, the shift from capital expenses to operational expenses offers greater flexibility and predictability in terms of costs. This shift enables companies to mitigate the risk of being bound by long-term commitments with vendors who fail to deliver on their promises after a high lump sum payment in advance.
However, the transition to a SaaS model also presents challenges for both vendors and buyers. Vendors may be tempted to underbid their competitors in order to win contracts, only to later increase prices through additional charges or changes in scope. Buyers must be vigilant in ensuring that all costs and services are clearly outlined in the contract to avoid unexpected expenses down the line. If a procurement team manages the RFP process with a focus on obtaining the lowest initial price, they may choose a vendor that is actually more expensive in the long run and even more mediocre in delivering value.
APPROACHING THE PROCUREMENT AND BUYING PROCESSES
During the procurement process, it is essential for buyers to conduct thorough due diligence on potential vendors. Buyers should approach their relationships with vendors with several key criteria in mind.
- Assessing The Total Cost Of Ownership: If there is a hardware component to the solution, how will upgrades, battery costs, and replacements be handled? Are training and support included, or will ongoing charges and fees drive the price upwards as time goes on? Will the differing tax liabilities (sales tax, property tax, etc.) between CapEx and OpEx models affect the total cost?
- Evaluating The Vendor’s Track Record: What stories can the industry point to that validate the vendor’s ability to help its clients achieve success? How long have they been in business? If they are a startup, is there material evidence that they’re disrupting the space with added value and less red tape? Do they have the right investment partners to stay around for the long haul?
- Seeking References From Existing Customers: It is best to reach out to existing customers yourself and select a wide variety, from recent customers to long-time buyers, to get a more accurate view of user sentiment over time, time to implement, ROI, etc.
It is crucial for buyers to look beyond the initial price point and consider factors such as installation, training, implementation, consulting, and ongoing support services. By taking a holistic view of the vendor’s offerings, buyers make more informed decisions and avoid potential pitfalls in the future.
Furthermore, buyers should pay close attention to the vendor’s culture and employee retention rates. A high turnover rate among employees can indicate underlying issues within the company that may impact the quality of service provided. By conducting a thorough assessment of the vendor’s culture and employee satisfaction, buyers gain valuable insights into the vendor’s reliability and long-term commitment to customer success.
The shift towards SaaS models in vendor management and procurement has brought about significant benefits for both vendors and buyers. However, it is essential for organizations to adopt a strategic approach to vendor selection and procurement in order to maximize the value of their investments. By focusing on transparency, flexibility, and long-term partnerships, and engaging the buying function within the business, companies are able to build successful relationships with vendors that drive innovation and growth while aligning on both organizations’ strategies.
Guy Yehiav is President of SmartSense.