Multistrat recently intervened in helping a client reduce their three-year spend on one of its large publisher renewals from €36M to €22M, without compromising on value. Our analysis revealed:
As you may expect, this ‘discovery’ shifted the nature of the renewal discussion and negotiation. The supplier’s expectation of a €3M increase in deal value and revenue to €12M per annum was re-vectored with our analysis, resulting in a ‘we overspend or underutilise 40% of the €9M we are already spending, and our additional need is actually €1,3M not €3M in the first year and €2,2M per annum thereafter’. The resulting conversations required a reset- a novel and creative approach with some trade-offs from both parties to bridge the gap and achieve their respective goals.
Unfortunately, this is not a situation unique to this customer. Below are the better practices we observe, which help to ensure situations like these are mitigated and/or avoided.
Engage in a competitive process when introducing new products: Despite constraints that may prevent a fully competitive process, the initial phase of a supplier engagement is when customers have the most commercial leverage, and this should be used whenever possible. Our benchmarks show that 72% of clients should have bought for less, with almost all single-sourced purchases falling into this category. A competitive versus single sourced process will often realise double digit (%) price reductions. This lower cost baseline extends for the lifecycle of the technology, not just the initial year, three years, or whatever the contract term.
A competitive process also realises more robust outcomes. The induced scrutiny optimises the Bill of Materials (BOM), SKU choices, and contractual terms, improving cost and flexibility.
In this client example, the €9M per annum initial contract value could have been between €6-7M (a 29% to 33% reduction), and the €2,2M new products from Year 2 could be reduced to approximately €1,9M (a 14% reduction).
Rarely can pricing be reduced to benchmarked levels at renewals, so a little more creativity and investment to help realise optimal from the outset is crucial!
Due diligence is key to ensuring you don’t buy what you don’t need: There is often an enthusiasm and momentum as solutions evolve from ideation and concept. Very often, these initial stages are where requirements are less refined, reflecting the ambition of both the internal solutioning or product team and the supplier sales engine. The level of business engagement and commitment to verify fit and adoption may also be at an early stage. It’s as these discussions translate to proposals that due diligence must kick in to not just validate what needs to be bought but really scrutinise and challenge;
There can be many (some unavoidable, some less acceptable) reasons why rigour in due diligence cannot be sufficiently applied but often the reason is simply lack of awareness, capability, and resource.
In this case, rigorous due diligence reduced their initial three-year TCV for the client’s new products demand from the estimated €9M to €5,7M (a 36% reduction).
Govern rigorously what you utilise: It’s not by accident that the better organisations are at managing their application estate, the less unutilised assets they have. These better practices combine ‘systemic’ tool-based data coupled with ‘un-systemic’ manual data gathering to generate a ‘true’ utilisation assessment of assets. It’s because these organisations invest in Software Asset Management (SAM), defining, measuring, and surfacing utility, that they can address with internal users and with their suppliers to bridge the gap. The reality is, many companies just don’t measure or measure in-effectively and are oblivious to the real value realised from their assets.
In this case, despite the supplier insisting their legacy BOM and volumetrics were still valid- to their bewilderment, their actual trailing twelve-month consumption was at its peak 60% and at its least 30% of what they were paying for. So, of the €9M annual spend, the actual value realised was at best €5,4M.
Establish and maintain the required governance: Just like SAM, partner and supplier governance is an underinvested area. If value post-contracting is to be maintained, then there has to be investments made into establishing and maintaining a relationship. Often, the most senior levels within a supplier organisation are most accessible at the deal making stage. Cultivate these relationships, punch above your weight, and enshrine them in governance. These will be the partnerships that can move the needle when challenges occur in the future. It’s unfortunate to witness how many companies do not understand these dynamics. It’s unreasonable to assume a supplier engagement lead will have the incentive or authority to measurably make a difference when material issues arise.
To reiterate, (although it sounds obvious): strengthen your competency to understand and use your commercial levers, especially at the outset of a supplier engagement, and question rigorously what is needed before you buy to ensure optimum engagement lifecycle outcomes. Also, acknowledging that not everything you buy today will be needed tomorrow, invest in accurately measuring and managing those dynamics to maintain value post-purchase.
At Multistrat, we believe in democratising insight! Helping our customers identify, cultivate, and optimise value from their IT suppliers.