The pandemic has reshaped expectations of how IT sourcing pros can enable business resiliency, continuity and agility in times of unexpected change. The crisis has also rescoped what it means to be a good steward of the technology and telecom budget. Today’s IT sourcing teams must do more to de-risk IT spend and secure protections that minimize the cost of disruption and transformational change.
In a recent survey, 47 percent of tech leaders plan to spend more on digital transformation in 2021 than in 2020.
The changes brought forth in 2020 have created new challenges for IT sourcing. Reprioritization of IT spend, accelerated purchasing cycles, rapid implementation requirements, new vendor partnerships – these are just a few factors that have created an IT buying environment rich in opportunity for overspending. That means it’s also a time when procurement best practices can make a big impact on cost control.
The crisis has unleashed a wave of critical digital transformation initiatives as well as new pressures to quickly deliver on those projects. According to research published by Spiceworks Ziff Davis, 76 percent of businesses surveyed plan on long-term IT changes in 2021 and 80 percent expect IT budgets to grow or stay steady over the next 12 months. Among organizations increasing budgets in 2021, 38 percent cite changes to business operations due to COVID-19 as a reason to increase spend, with 36 percent citing the need to support a remote workforce during the ongoing crisis. In a separate survey by TechRepublic, 47 percent of tech leaders surveyed plan to spend more on digital transformation in 2021 than in 2020.
Many businesses are reexamining how IT sourcing can increase IT agility from both a cost and functional perspective to ensure operational resiliency. The ability to easily respond to changing business requirements with minimal disruption and well-managed cost is now an IT sourcing imperative. In this bulletin, we list eight steps IT sourcing pros can take to meet this mandate.
“Covid-19 was the burning platform that finally made laggards take the plunge. The result: a six-year acceleration in digital transformation efforts across the board.” —Forbes
It’s best practice to build flexibility into vendor agreements to prepare your organization for changing user counts and requirements. That’s even more important today as companies prepare for a post-pandemic business climate that could look very different for many businesses. Those changes will ripple through markets creating new waves of adjustment and competition that will drive aftershocks of transformation. Just as the first wave did, these will create new winners and new losers.
For optimal agility, it’s important to secure price protections – such as well-negotiated tiered pricing (as applicable) and upgrade/downgrade structures – that allow for changes in demand. While most IT vendors are hesitant to provide “flex down” contract language, having tiers that reflect not only growth but also contractions could mitigate price hikes. Renewal protection is also an area to be explored. Contract language should either remove or cap the ability to increase pricing for a specified period of time. Also, negotiating the ability to rollover any unused “units” for underutilized IT assets can help you get more mileage out of your IT investments for lower total spend.
Despite some vendors offering more flexible payment terms and pricing in response to the pandemic, it’s still business as usual. Pricing disparity for same-scope purchases is as prevalent as ever – and that’s even more true if the vendor senses the customer has a tight deadline. Performing IT price benchmark analysis for renewals and new purchases will validate you’re getting a fair deal from your vendor and ensure you pay a price that’s at or better than market. Note – don’t be surprised to find out a vendor’s “pandemic-friendly” pricing (with a push for early renewal based on that pricing) is still well above fair market value. Many enterprises make it a requirement to subject purchases over a certain spend threshold (for example, $75K) to third-party price benchmark analysis for validation – this is a rapidly expanding best practice.
Another way to get rid of toxic spend is to right-size license assignments and liberate license currency on major SaaS software estates. This will help you identify areas where you’re over- or under-licensed and ensures you’re only paying for what you actually need. Another byproduct? Elimination of shelf-ware that may be inflating maintenance and support costs.
How will a post-pandemic business climate impact your IT environment (e.g. software user counts, IaaS requirements, etc.)? Will workers need access to more or less functionality if they return to the office (or permanently stay remote)? Will accelerated digital transformation initiatives require more cloud investment?
These are just a few questions highlighting the importance of negotiating contractual business terms that allow for flexibility. Software examples include the ability to upgrade/downgrade licensing and subscriptions, use tokens or credits to meet changing usage requirements, and apply annual monetary commitments across disparate product families (e.g. Salesforce and Tableau).
Many vendors are offering flexible payment terms that allow customers to defer payments. That’s been helpful for companies that need to rapidly expand IT investments without taking a near-term financial hit. But extended payment terms typically come at a price – usually in the form of smaller discounts. Any payment relief up front can quickly be negated by higher costs over the term of the contract as well as having a lower discount as a baseline during renewals. If you’re considering taking advantage of more flexible payment terms, be sure to model and factor in the long-term cost impact as part of your decision.
Competitive pressure shouldn’t be limited to new purchases and renewals. Keeping multiple vendors/solutions in the mix throughout the vendor relationship gives you credibility at the negotiation table. It’s also best practice for business continuity and resiliency. To that end, IT sourcing teams should prioritize critical business processes and the vendors and solutions that support them. For processes supported by a single vendor/solution, consider a multi-vendor approach that eliminates single points of failure and strengthens leverage.
Disruption and economic volatility have done little to slow the frequency with which software vendors are auditing enterprise customers. If anything, vendors find themselves at an advantage. Customers’ adaptations to changing business requirements have created ample opportunity for software license noncompliance. The best way to minimize compliance risk is to stay in front of it by performing internal license position assessments on large software estates. This will help companies easily spot and remediate unintentional compliance issues before an audit happens.
It’s one thing to have a multi-vendor strategy to ensure business continuity, but another thing to unknowingly pay for redundant functionality. Even before recent disruptions, solution overlap plagued enterprise IT ecosystems and budgets. Decades of decentralized IT sourcing and shadow IT have made it easy for companies to unknowingly pay for multiple tools that do the same thing. Today, new technical requirements driven by transformation projects are prompting companies to look even further outside of their existing vendor/solution portfolio – often without first evaluating whether existing investments can meet those requirements. Now is a good time for companies to clean up redundancies in their IT environments, identify unknown solution overlap, and leverage existing vendor relationships (and spend) to rationalize.
The impact of the pandemic on contract performance obligations has caused businesses and vendors to reexamine force majeure clauses. Specifically, they’re determining if these clauses excuse them from any contract specifically define epidemics or pandemics as triggering events – but that may change as companies seek to modify the scope of coverage and prepare their businesses for the next unforeseen crisis. The legal runway for standardized changes to these clauses could be long, which is all the more reason for enterprises to start exploring changes that will better protect operations in the future.
New pressures on IT sourcing bolster the business case for investments in services that support the IT sourcing function. These include third-party price benchmark analysis, license optimization assessments, audit defense, and licensing experts on the customer’s side of the table for large spend events like multi-year EA renewals. These services help IT buying teams move with speed and confidence, accelerating purchases and clearing the path for transformation and business resiliency.
Despite some IT vendors offering more flexible payment terms and pricing in response to disruption, it’s still business as usual. The risk of overspending is as great as it’s ever been.