In 2019, Harold joined a boutique travel agency as a Marketing Executive. Business was booming and life was good. So good that Harold got a raise for overseeing a successful marketing campaign that contributed to a substantial increase in revenue for the company.
Fast-forward six months and the world was left shell-shocked by the pandemic. Arguably, more than other industries, the travel & tourism sector was hit the hardest. Harold’s company was left with no choice but to enforce a pay cut for all employees. When the news of the pay cut was announced, Harold realized he had to find a way to reduce his monthly expenses in line with the cut to ensure he could ride the wave out successfully. Being an expat, Harold’s biggest monthly expense was rent. Therefore Harold decided to ask his landlord whether he could receive a temporary reduction. His request was politely declined by the landlord. Harold was disappointed with the outcome, but he understood why. His landlord depended on the monthly income from rent to survive. Now that there was no room to lower his rent, Harold had to look for alternatives.
When his monthly credit card statement arrived, Harold decided to investigate it a little more than he normally would. This proved to the “aha” moment for him. He took notice of his monthly recurring expenses; four streaming subscriptions, a subscription which provided access to different fitness classes, a bi-weekly wine delivery service and finally, a weekly delivery of his favorite coffee roast. Harold knew immediately that he could do without some of these expenses and decided to consolidate his streaming subscriptions and settle with just one. He also temporarily halted his fitness subscription as his regular gym was closed due to the pandemic. He decided he could live without a fully stacked wine chiller and his weekly dose of fresh coffee so he temporarily paused both subscriptions. The results proved to be very positive. Harold saved nearly as much as he had hoped to save in monthly rent had his negotiation with the landlord been successful. Harold felt confident he had his finances in order given the adversities. The moral of the story? Optimizing multiple lower value expenses could lead to the same result as eliminating one large expense.
Whether it is to keep the lights on or to fund digital transformation initiatives, constant cost optimization continues to be a core objective for many organizations. When looking for cost optimization opportunities, more often than not organizations tend to lean on areas where they are spending the most; just like how Harold initially believed his best bet at reducing expenses would be by lowering his biggest one - rent. However, by analyzing and proactively managing the comparatively lower value assets and subscriptions, opportunities to optimize will arise.
In the context of software spend, an organization typically follows the Pareto Principle. This means 80% of an organization’s software spend is incurred with only 20% of software manufacturers. The 20% is commonly referred to as Tier 1 spend, characterized by significant contract value, low volume of transactions and closely investigated and negotiated terms.
Moving further down the curve, Tier 2 and Tier 3 are where organizations encounter a high volume of transactions of lower value purchases when compared to Tier 1. Commonly known as the tail, purchases in this segment add up to a noteworthy monetary value and more interestingly, account for significant operational effort. Consolidating purchases in these tiers and channeling them via the right supplier could enable your organization to achieve the following benefits: