why-organizations-should-look-beyond-their-tier-1-software-spend

Why Organizations Should

Look Beyond Their Tier 1 Software Spend

Why organizations should look beyond their Tier 1 software spend for cost & process optimization

  • 25 augusztus 2021
  • 5 minutes to read

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:

1. Direct Cost Savings

According to a study conducted by Boston Consulting Group in 2019, organizations that actively manage their tail spend can realize savings of anywhere between 5% and 20%. To put those percentages into context, if your organization spends $5M on Tier 2 and Tier 3 software, you could save anywhere between $250K to $1M. Organizations need a strategy focused specifically on operational efficiencies and digitization when it comes to the tail-end, rather than on contract negotiation and use rights optimization which are typically applied to Tier 1 publishers. But the results can still be significant, as the study demonstrates.

2. A Streamlined Product & Portfolio Strategy

Harold had four streaming subscriptions. It was only after he analyzed his credit card statements that he realized all four perform the same function - providing him access to online content he hardly had time to view. Similarly, many organizations fail to enforce a rationalized product and portfolio strategy. A streamlined and rationalized product and portfolio strategy would eliminate waste by avoiding the purchase of duplicate technologies that perform the same function. This in turn provides leverage in negotiating with a preferred software manufacturer, or enables more cost effective enterprise-wide agreements and direct savings.

3. Enriched Reporting & Visibility

Simply put, you cannot optimize what you cannot see. If Harold had multiple credit cards to which his various subscriptions were being billed, the chances of him finding opportunities to consolidate and optimize would have been significantly lower. Similarly, buying Tier 2 and Tier 3 software via multiple channels could lead to asymmetries and inconsistencies where organizations end up spending more time consolidating the different data points when they could be using that time to brainstorm and action the insights. Working with the right partner could allow your organization to capture key software spend data in a uniform and consistent manner at the point of purchase. This data can then be used as the foundation for effective decision-making.

When looking for cost optimization levers to pull, do not discount the role an effective tail spend management practice can play. Leveraging a single software supplier to channel your purchases through could allow your organization to capture key spend metrics at the point of purchase. Like Harold, leveraging this data to drive cost optimization initiatives would result in positive outcomes. Cost savings don’t need to come at the expense of productivity or innovation. Every organization can benefit from a digitized software supply chain and find savings through the right combination of process efficiencies, automation and the right partner.

Achieve Cost Savings with a Digitized Software Supply Chain

SoftwareONE can help your organization gain clear insight into every tier of your software spend and identify opportunities for consolidation and cost optimization.

Learn More
  • Digital Transformation, Digital Supply Chain
  • Digital Supply Chain, Software Spend

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