Category Archives: Guest Author

OEM Software Maintenance: Should I Stay or Should I Go? Part II

Today’s guest post is from Torey Guingrich, a Project Manager at Source One Management Services, who focuses on helping global companies drive greater value from their expenditures.

As a strategic sourcing consultant, the very broad category of “software” seems to always be an area in which companies are looking to reduce costs. . But is there an opportunity to substantially reduce maintenance costs if you want to continue utilizing the applications? Are third party maintenance providers an option?

The first step to answering these questions is to properly frame questions with IT to better determine if third party maintenance is a potential solution for your organization. Yesterday we provided you with the important Application Lifecycle questions. Today we address value from support, level of customization, and level of response.

  • Value from Support:
    • How often do we engage with the vendor support?

      Assuming you are in a stable environment that opens the door for third-party maintenance, consider the support/content you are receiving and utilizing from the software publisher directly.

    • Are we apt to upgrade with every release or do we tend to push off upgrades?/What are the pain points in upgrades and what is the perceived value we see from them?

      Third party providers provide break/fix support, troubleshoot bugs and typically provide tax/regulatory updates as well as potential support for customization, but you would not be eligible to receive updates and upgrades direct from the OEM. This is an opportunity to discuss with IT your organization’s typical appetite for change, e.g. do they immediately act on update/upgrade opportunities, or do you typically push these out for a few releases? It is not uncommon for OEMs to charge (or try to charge) back maintenance for some period of time when an upgrade is warranted, so you shouldn’t be cutting ties if you have planned upgrades or new version releases in your roadmap (assuming you are upgrading due to perceived value, as opposed to being forced off an older release by the OEM).

  • Level of Customization:
    • What level of customization does the system have and what support is in place for that custom code?

      When applications are highly customized, standard maintenance from the OEM is very unlikely to support those customizations. Many third party providers do include support for custom code in the cost of annual maintenance which may be an opportunity to alleviate the work of internal resources or other providers you may be utilizing to support customizations. Consider how customized your environment is and the level of effort IT resources (internal or external) spend to support that custom code; question your IT stakeholders on the systems that are most customized and any past issues they may have run into when it comes to customization (or if they already rely on an outsourced model to do so). Highly customization systems typically run into issues when it comes time to upgrade, so if your company has delayed upgrades or prefers to retain the current version because of the level of customization, this again may be an opportunity to look to third party maintenance.

  • Level of Response:
    • How happy are you with the level of support and responsiveness from the vendor?

      One final area to consider are the service levels/guarantees of your current support model. Third-party maintenance providers tout their strong SLAs and dedicated account management, with many offering 24×7 support and aggressive response and resolution timeframes. While some customers think this alone may be a reason to switch maintenance models, work with IT to try and quantify the frequency with which you engage the current support model and if there is truly a business impact or benefit that could come from stronger or more responsive support.

While third party maintenance providers boast large reductions in cost (many market a 40-50% decrease in annual maintenance cost), Procurement needs to work with IT to define if these providers can be used strategically given the considerations above. Considering compressed IT budgets and heavy reliance on ERP vendors, it may be high time to explore the options in the market, have the conversation with your IT leadership, and challenge third party providers to help you determine if they are a good fit given your current environment. At the very least, this option can be used as a leverage position with some of the software giants out there to negotiate maintenance percentage or mitigate increases to maintenance structures.

So now you need to decide, Should I Stay or Should I Go?

OEM Software Maintenance: Should I Stay or Should I Go? Part I

Today’s guest post is from Torey Guingrich, a Project Manager at Source One Management Services, who focuses on helping global companies drive greater value from their expenditures.

As a strategic sourcing consultant, the very broad category of “software” seems to always be an area in which companies are looking to reduce costs. The spend categorized as software is usually compromised of some net new licenses purchases, perhaps annual subscription based licensing, but almost always has a large portion of spend that is actually ongoing maintenance and support for previously purchased licensing. But is there an opportunity to substantially reduce maintenance costs if you want to continue utilizing the applications?

While third party maintenance providers are expanding their ground for many hardware and software solutions, one of the more prominent areas of expansion has been in managing annual support costs associated with ERP systems where the cost of maintenance can be a staggering, and ever-increasing, amount. While there are some conflicting opinions on the future of ERP third party maintenance given the ongoing legal battles in recent years, there is a strong case to be made that third party maintenance as a concept will not being going away anytime soon. While Procurement professionals may be enticed by the opportunity to slash a software budget, does it make sense for your company to cut to ties with native maintenance services from the software publisher and how should you go about evaluating this option for your company and/or discussing it with the stakeholders who manage those relationships?
The areas below will help Procurement frame questions and discussions with IT to better determine if third party maintenance is a potential solution for your organization:

Application Lifecycle:

  • What are the current owned licenses and associated maintenance costs/structures? Gaining visibility into the current software and maintenance environment is key to determining the scale of software maintenance costs as compared to other areas of spend within the IT budget.
  • What is the roadmap for the current software system in use? Once you have isolated the primary solutions that drive maintenance costs, it is important to set the stage for measuring stability in the environment. If a particular system is planned to be replaced or retired in the next few years, it may be a great opportunity to explore third party support for a limited time on the system being decommissioned before the new system is put in place.
  • How long has the solution been in place?/Have you recently launched or upgraded the solution in questions?/How stable is the environment? Immature and unstable environments tend to rely more heavily on OEM updates, upgrades, patches, and other content than those that have been in place for many years. Stability of the current environment is a key component in evaluating opportunities for third party maintenance as any change may be disruptive without the comfort of patches and regular updates from the OEM.
  • Is there a desire to keep the current system beyond the period the OEM offers support or are we being forced to upgrade where we would rather not? If you discover that the environment is very stable with no planned upgrades, you may have the option to actually extend the life of a certain application or release by leveraging third party maintenance where an OEM is no longer offering support.

These necessary questions are just a few of the key questions you need to ask. If the answers to these would allow a third party provider to be considered, the next step is to assess value, customization, and response. We will discuss these issues tomorrow in Part II.

Is UNSPSC Really the Best Route? 3 Reasons … ‘Against’

Today’s guest post is from Brian Seipel, Spend Analysis lead at Source One Management Services focused on helping corporations gain a clear view of their spend data to derive actionable budget optimization strategies.

In Part I, we discussed three reasons for the standardized taxonomy of UNSPSC. But it’s not always all sunshine and roses. Today we will discuss three reasons against.

The Downsides of a Standardizes Taxonomy

Recall I mentioned that standard taxonomies are a great start. However, we will want to move beyond the confines of these models to compensate for a few critical problems you’re likely to face.

  • Alignment to organizational needs and strategic sourcing goals may be lacking
  • Structural rigidity may not align with organizational profile
  • Contain a good degree of built-in granularity (yes, this is both a strength and a weakness)

All three problems above come down to a lack of proper fit – both in terms of organizational usage and an action-oriented focus.

First, let’s return to our overarching goal: to make sense of spend and identify areas of focus for future savings initiatives. Looking at UNSPSC through this lens, you may find that it difficult to source strictly according to this taxonomy. I’ll give an easy example – when organizations bring in commercial printers for promotional materials, they tend to also buy branded tchotchkes from these same vendors. It makes sense; both items are planned for and purchased at the same time to be used at the same events. Suppliers often work in both of these spaces for this reason, but you wouldn’t know it following UNSPSC strictly. We’re in two separate areas of the code. As a harder example, think about your trusted, value-added IT vendor. This supplier may provide hardware and software across a range of departments, integration and engineering support, and handle your maintenance contract after installation. Draft up a list of products and services, and pull a UNSPSC code to cover all aspects of this supplier relationship – go ahead, I’ll wait. If I had to guess, you likely quit halfway through writing up a pretty long list.

Second, these are rigid structures are inherently one-size-fits-most in nature. UNSPSC can be great for some industries, but may not align well to others. I mention earlier that UNSPSC did tend to get detailed in a number of areas and, if you’re primary focus leans toward the machinery or MRO side of procurement, you may never need to venture beyond UNSPSC. However, any company with a more specialty focus may not get the coverage they need. The purchase of specialty chemicals may have a head start by using UNSPSC as a baseline, but the taxonomy won’t have the granularity to truly understand purchases as-is. One way to solve this issue is to blend additional supplementary detail where needed to make up the difference.

I will close this section with a word of caution. Twice now I’ve talked about the power of granularity, either already found in UNSPSC or added as a supplement afterwards. As such, it may seem odd that I’m considering categorical granularity as both a strength and a weakness – which case ends up being true for you will largely depend on what you’re doing with this level of detail. If you can use this granularity for better isolating and targeting savings opportunities, then throw this under the strength column. However, “paralysis by analysis” is a very real threat to a timely spend analysis project. Consider office supply purchases. One could easily adopt a taxonomy to drill down to a very granular level, separating black ink, felt tip pens from blue ink, ball points – but, would you ever really want to? Always ask yourself, “is more granularity truly necessary to get at the heart of this spend? Will this place of lesser detail hinder this project?” If you don’t need more detail, don’t invest the time. In this case, both pens would be purchased by the same internal groups and from the same suppliers. Spending time classifying to this level, or holding meetings on the best way to characterize paperclip groupings, is a waste.

Never Forget your Ultimate Purpose

It can be tempting to opt for a standard taxonomy, as is offered by UNSPSC. The value they provide is especially obvious early in the process when faced with dirty data, particularly if this is your organization’s first foray into spend analysis.

This temptation, however, will always be short-sighted. It is critical to wrangle spend and develop a clear picture of where your organization’s cash is going, true, but doing so without a clear path forward (one that leads to cost savings) is only going to stagnate strategic sourcing initiatives, leading to lost opportunity costs.

Always stay focused on answering this key question, “what is my best path forward to identifying savings opportunities?” and develop a taxonomy that will lead you there. Starting with UNSPSC can be a great foundation, but always consider where the taxonomy falls short for achieving your goals, and fold in more customized categories of spend where appropriate.

Thanks, Brian!

Is UNSPSC Really the Best Route? 3 Reasons ‘For’ …

Today’s guest post is from Brian Seipel, Spend Analysis lead at Source One Management Services focused on helping corporations gain a clear view of their spend data to derive actionable budget optimization strategies.

A common question many organizations have when delving into a spend analysis project is, “which classification taxonomy should I be using?” There are plenty of options on the generic end of the spectrum, UNSPSC being a popular choice. These standards certainly have their advantages, but choosing whether to use one of these standards or something entirely different is ultimately a matter of what will work best for the task at hand.

So, the real question is – What is your primary goal, and which taxonomy will best help you reach it?

Defining Goals

Before we begin, it is important to define what, exactly, our goals are for our spend analysis project. In this case, the spend analysis will be directly supporting the identification of strategic sourcing projects.
Certainly, we want to view our organization-wide supplier base and spend profiles using a commonly understood model so all stakeholders, departments, and C-suite executives are on the same page. One problem many organizations face is that different departments or offices speak different languages when it comes to defining supplier relationships. Add a merger or acquisition to the mix, and chaos can easily ensue.

But this isn’t our end goal – this is just a single, albeit crucial, step in the process. Our true end goal is to provide the ammunition needed to best identify opportunities for cost saving initiatives. No taxonomy, no matter how thoughtful or detailed, can be considered valuable if it can’t help promote change. As such, we should select a taxonomy based on two key parameters:

  1. The taxonomy must be universally applicable to all company spend.
  2. The taxonomy must aid in developing actionable information for future cost saving initiatives.

The Benefits of a Standardized Taxonomy

First, let’s discuss the key reasons to choose a standard model, such as UNSPSC. There are a few great aspects to these model that make them a good starting place for your taxonomy development:

  • Standards are pre-developed and ready-to-use
  • Contain a *good* degree of built-in granularity
  • Wide availability of data enrichment options exist

Right off the bat, one of the largest draws of using a standard taxonomy is that the structure is already in place, ready-to-use. UNSPSC has you covered for any spend your organization is likely to see, from office supplies (commodity code “4412″) to graphic design (“8214″) and beyond. Additionally, there is already a level of granularity at your fingertips: The telecommunications media services includes 10 immediate sublevels with greater detail, from local and long distance service, to mobile communications, and more.

You’ll note my asterisks here; while this granularity is great in many cases, it isn’t always up-to-task across the purchasing spectrum – more on that later. In any case, if you’ve been tasked with the herculean job of collecting, cleansing, and ordering a vast set of spend data covering your entire organization, being able to pick up and implement a taxonomy immediately is one less task on your plate to worry about.

What’s more, this hierarchy is both well-known and heavily utilized. There are plenty of organizations you can turn to that, for a fee, can append your spend data with appropriate categorizations. The appeal here is obvious – one of the more time intensive elements of performing a spend analysis is either developing and validating a rules-based system for categorization or slogging through the process manually.

Jump in feet first, hit the ground running … Pick your action-packed metaphor; a standard taxonomy gets your project started faster – and that’s huge.

But is it all sunshine and roses? Stay tuned for Part II!

Enhancing MRO Supplier Value through Contract Service Levels

Today’s guest post is from Jennifer Engel, a Senior Supply Chain Project Analyst at Source One Management Services, responsible for executing strategic sourcing and process improvement initiatives.

Despite the convenience of boilerplate language and pre-approved templates to expedite execution, contracting is never a one-size-fits-all process within any silo of a business. Contracts for professional services tend to require a focus on performance expectations, and rarely have a need for protection against pricing volatility, lead time requirements, and fuel costs. Diametrically, contracts for the tactical purchase of goods focus not on service levels, but on maintaining pricing, ensuring product availability, and outlining delivery terms.

A trait often unique to the Maintenance, Repair, and Operation (MRO) space within a business is that many suppliers are providing a combination of both goods and services that support overall operations. As a result, contracts within this space are difficult to mold to a single template, and constructing agreements without taking into account the business needs to cover each area can be detrimental to the overall relationship goals. When undergoing contracting with a new or existing supplier, there are a few key principals to keep in mind that will benefit both parties as well as drive best value in pricing and service levels.

#1) Fully assess the risks associated with the goods and services separately

When negotiating terms, it is important to prioritize the areas that could most drastically impact the business should a change occur. If the pricing of a good is tied to a volatile commodity index or may be subject to interruptions due to raw material availability, protecting exposure to these factors should be at the forefront of the agreement. If the service associated is more critical than the actual good, for example a specific sanitation chemical being less critical than the completion of the actual sanitization process, then the level of service needed to ensure the business can continue to operate at or above standards should take priority. This primarily holds true to categories for which product substitutes are widely available, however the end result of the service is critical to business continuity.

#2) Adjust the terms of the agreement to form a mutually beneficial relationship that does not expose either party to significant risk.

Explicit service levels and pricing escalators and de-escalators inherently protect the business from any supplier shortcomings or market changes. As long as commodity increases are tied to a verifiable index, are accommodated by a manufacturer’s letter and advanced notice, and de-escalate at an equal rate should pricing decrease, the supplier is protected from becoming insolvent and the customer is protected from realizing an increase not driven by market conditions. For goods not driven by an identifiable index, pricing increases should be capped at a reasonable rate and subject to review and mutual agreement of the involved parties.

#3) Leverage rigorous service levels as another tool to drive negotiations and ultimately satisfy both parties.

As long as supplier expectations are detailed, measurable, and tied to a condition of termination with cause, there is less business risk to include contract language that may be viewed as more favorable to a supplier than the customer. A common point of disagreement in most MRO contracts is term length. Businesses are hesitant to engage in two or more year agreements with fear of dissatisfaction in a supplier’s performance. From a supplier standpoint, these lengthier terms allow them to invest more heavily in a specific customer without risk of being replaced in the near term. As a result, suppliers are often more likely to give more favorable pricing and terms under these extended agreements. Another point of leverage that incentivizes suppliers to offer more competitive terms is exclusivity clauses or volume commitments. Both can be high risk for a business to include, however are easily protected under strict service levels and quality expectations outlined in the agreement.

When putting together such agreements, stakeholder involvement should go beyond the legal department and relationship owner (department manager and/or procurement). End users, and those more closely aligned with the day to day operations should be consulted to outline critical functions of the supplier and bring to light any historical or future potential issues that will impact the integrity of the relationship or daily operations. Contracting should be viewed as opportunity to maintain and strengthen the relationship from both parties, and not seen as a necessary evil of back and forth on general language until legal departments reach consensus. Dedicating the extra resources necessary to construct a detailed and forward thinking agreement will prove beneficial in the long term, as company standards will be maintained without sacrificing cost competitiveness.

Thanks, Jennifer.