Category Archives: Best Practices

Vinnie Mirchandani on “The Costs of Software Renewal” (Repost)

This post was originally posted there years ago today on October 22, 2009. Given that three years is a typical mid-term renewal timeframe, I think it is important to review Vinnie’s advice as renewal season is now upon us!


Today’s guest post is from Vinnie Mirchandani of “Deal Architect” and “New Florence. New Renaissance”. Vinnie, a founding member of the Enterprise Advocates, is a tireless advocate of trends and technologies that can help buyers get more for less.

Ray Wang gives us a timely reminder that “Labor Day (US & Canadian Holiday) traditionally marks the end of summer BBQ’s, the beginning of the fall conference season, and yes, the time to begin a review of your software maintenance contacts that expire at the end of the year.” (Software Insider, Sept 1, 2009)

I would say start with that — and then keep going. Take a look at all of your contracts that renew through the end of 2010.

Several good reasons to this include:

  • Establishment of a savings target on the total maintenance spend for 2010.
    Have your staff focus on every software contract, especially those that have been “auto-renewed” for years now because they were “small” and fell under attention thresholds. If you make the overall target part of a compensation plan for key IT and procurement staff, you’ll quickly find that Thar’s gold in them yellowing software contract files.
  • Multi-year maintenance deals which looked good when signed may now be overpriced.
    Current market trends are driving the cost of maintenance down, especially through third party services. Don’t assume they cannot be re-opened. (See Marc Freeman’s tips for “renegotiating with integrity” on the ISM site.)
  • If you don’t start now, you might not finish the renegotiations in time.
    Don’t overestimate the ability of your team to get organized — or underestimate the ability of the vendor team to stall — beyond the end of the year. If maintenance expires, and something goes wrong, you could be at the vendor’s mercy in renegotiations. Formally document your new process and let the vendor know next year will be different. Furthermore, be sure to allow 6 months for the renewal negotiation next year.
  • Even if you are looking to migrate, you will still need incumbent vendor support until the cut-over occurs.
    This holds true whether you are looking to migrate away from the incumbent vendor to SaaS, or to third party maintenance, or to do-it-yourself support (and readers of Deal Architect will know I am a broken record on the subject of considering all of these options). This will likely push you into 2010 planning and funding.

So, use Ray’s call for intensity over the next 3 months and build momentum for another 12 months. The payback will be huge — software maintenance continues to be one of the items on the IT menu with the most “empty calories“.

Thanks, Vinnie!

Are You Ready for the 4th Quarter Crunch?

Even though businesses can choose their own fiscal years, many choose to coordinate with the calendar year. As a result, the 4th quarter is now upon them, and, in any company that is not best in class, a lot of people are getting anxious about meeting their numbers. It happens every year, and even if I’m not oot and aboot (NSFW*), I see it indirectly every year in the 4th quarter slump (when blog stats take a temporary dive).

And this year, many supply management professionals have good reason to be worried. While the economy has started on the road to recovery, the road is full of potholes and, with the impending U.S. election, we don’t know what’s going to happen and whether or not the U.S. Congress that is elected on November 6 is going to vote to raise the debt ceiling or take the U.S. over the fiscal cliff. Given the lack of sound economic and global trade policy since Clinton left office, it’s hard to say what’s going to happen.

The issues is that many of these professionals did’t plan for the rapid increase in some commodity cost categories, talked about risk but never took mitigating actions, and didn’t take the time to upgrade their skills so that they could continue to do more with less (as we all know that even though many companies are spewing the talent talk, they aren’t engaging in the talent walk [and will be surprised when the market eventually rebounds and their top talent walks out the door, but that will be another post]).

But the year’s not over yet, and there’s still things they can do to not only mitigate the “damage” that is expected as year-over-year spend increases, but contain costs and demonstrate their ability to add more value to the organization before the year is up.

Three things in particular that they can do right away are:

  • Have Finance Agree to Better Cost Savings and Avoidance Metrics
    As discussed in yesterday’s post, savings on categories negotiated this year should factor in (index & formula based) commodity rate increases and exchange rate fluctuations and cost increases on spot-buys should be calculated using similar year-over-year comparisons. This way, even if the Sourcing team couldn’t get to as many categories as they’d like, and savings were less than anticipated, a better, more realistic, picture is painted.
  • Start Monitoring Contracts and Supplier Performance more Actively
    Has the supplier been billing at contract rates, honouring discount levels, and shipping on time with an acceptable defect rate? If the supplier is over-billing, if discounts are missed, and if shipments have to be constantly expedited at higher costs, the savings that were negotiated evaporate rapidly. Increasing the rate of savings capture across all high-spend categories will go a long way to meeting targets.
  • Take some online / distance training that can be done after hours
    Increase your skills, increase your efficiency, increase your supply management opportunity astuteness, and do better at every task you do. There are a number of options, and some, like Next Level Purchasing, offer certifications recognized to various degrees around the globe.

And then they can start planning for next year by pushing for the acquisition and implementation of better technology and the transition to new and better processes.

* But hilarious!

How do you measure savings?

It’s a tough question, but if you’re good at what you do, and you want to “win” at the end of the year, be sure you factor in currency fluctuation, inflation, and, if necessary, demand shift, because, on a per-unit basis, you can always save against market average if you’re good at your job and normalize the expenditures.

Here’s the foundation for a simple formula you can use to make this measurement. In reality, it will be a bit more difficult as you’ll have to calculate the actual increase in cost due to a change in the commodity index (as the commodity will only be one cost component in the total cost of the good being purchased), the realized difference in the exchange (as the currency conversion may cost you additional basis points), and the demand shift relative to a fixed interval, and not a fixed point, in time. But this simple example will suffice to show how, if you calculate appropriate unit costs, you really can’t lose even if the overall spend in the category goes up (because, without your efforts, it would have went up a lot more). And this is just fine (as long as you don’t double count the savings some other way).

Let’s say that, using appropriate benchmarking, backed up by indices and correlating cost models that are accepted by finance as reasonable, you calculate that the average market price per unit is $12 and you sign a contract for $10, for an expected savings of $2. Then, a year later, you find that the result of commodity inflation increases the cost per unit $1.20, for an increase of 10%, and the currency exchange increases $0.05 not in your favour, for an increase of 5%. What have you saved?

Savings/unit = (market cost/unit) – amount paid * (1 + currency increase) = 13.2 – 10 * 1.05 = 13.20 – 10.50 = 2.70

  market cost / unit = (base price/unit + cost increase/unit)

% Savings/unit = (savings/unit) / (market cost/unit) = 2.70 / 13.2 / 20% (WOW!)

Now, let’s say next year, you agree to a price increase to $10.50, but inflation increases unit costs by another $1.80 and the currency exchange only falls to $0.03 not in your favour. How did you do year over year?

Savings/unit = (13.2 + 1.80) – 10.5 * 1.03 = 15 – 10.5 * 1.03 = 4.19

% Savings/unit = 4.19 / 15 = 28% WOW!

  Costs increased 10%, but you increased your savings of 20% against market average to 28% against market average year over year! Looking at the big picture makes a difference since accepting 50% of the cost increase saved you considerably in the long run as prices continued to rise.

Three Critical Operating Imperatives to Mitigate Increasing Volatility

This summer, Patrick Burnson, the Executive Editor of the Supply Chain Management Review, published a great piece on Operating Imperatives to Mitigate an Increasingly Volatile 2012 that summarized the findings of a recent Hackett Group piece on “Six Imperatives to Respond to Increasing Economic Uncertainty”.

In brief, the six imperatives were:

    • Pursue World-Class Cost Levels
      Typical companies can realize average savings of 27 percent on the delivery of their main business services functions by achieving world-class performance levels.
    • Reduce Complexity
      In finance, for example, reducing application architecture and data complexity can enable process cost reductions of nearly 50 percent.
    • Redesign Process, Governance, and Organization Models
      Adopt business process reengineering focused on an end-to-end approach for both transactional and knowledge-centric process.
    • Move from Functional Centralization to Global Business Services (GBS)
      Oranizations that migrate to a GBS model typically go through three stages of complexity, and most are still moving from stage 1 to stage 2, which is the basis for our last post where we asked how advanced your shared services really are.
    • Build a Common Integrated Technology and Information Architecture
      Hackett Group’s research confirms that the IT strategy of technology architecture rationalization is a top priority.
    • Upgrade Talent to Support Today’s New Realities

Talent is the most critical competitive differentiator today.

But as far as SI is concerned, if you really want to mitigate volatility, the three you need to focus on, in order, are:

  1. Upgrade Talent
  2. Reduce Complexity
  3. Implement Better Technology

Because if you do this, the other three factors will fall into place. Talent realizes the best way to get results is to work efficiently and effectively and will start by trying to reduce unnecessary process complexity. If you let them do this, they will be able to redesign process, governance, and organization models to better fit your organization. This will allow them to not only impelemtn better technology, but do so in an integrated fashion. Then they will be able to get consolidate views of data that will translate into decision support information that will allow them pursue world-class cost levels. In this effort, they will determine if the best results will be obtained by keeping the function in-house or moving to a GBS model. And then the new realities will be supported.

It’s ultimately all about talent, technology, and transition — and talent has to come first.

PDF? PDF? You call that e-Invoicing?

Over on the TradeShift website, a recent post highlights “the downsides for enterprise” of PDF invoicing. I know that SI has been preaching going “e” at all costs, but, where Supply Management is concerned, PDF is not really “e”. It’s just paper being sent over the wire.

When your buyer’s organization gets a PDF invoice, the accounts payable clerk has to print it out and then manually enter the information in the accounts payable system. And yes, they typically do have to print it out as they are usually given a single monitor setup and the entire display is usually taken up by their AP program so they have to print it out. So all you’ve done is shifted the task of printing out the paper (and killing a tree) to them.

And, more importantly, you haven’t increased the speed at which they can process the invoice, or the accuracy, and have sacrificed the benefits you get when going electronic. If you use EDI, XML, or another standard, open, document format, then the buyer can import it into their AP system automatically with 100% accuracy — and you get all the benefits that go along with faster, 100%, accurate processing. These benefits could include getting in the queue in time for early payment discounts (should you want a quicker payment) and a buyer who can more quickly detect who the active, relevant, suppliers are as your transactions get in the system faster.

So don’t replace paper with PDFs that just get turned into paper. It doesn’t help anyone. And don’t trust anyone who claims they have software that can “automatically process PDF invoices”. There are so many different invoice formats that there is no software that gets, or even comes close enough to, 100% accuracy that you know, at some point, your invoice is going to get totally messed up and you are going to get 201,211.13 for that Million dollar invoice (when it thinks the date stamp, 20121113, is actually the total amount due).