Staying Focused on Mid-Tier Negotiations and IT Tail Spend

Proper management of IT procurement is a critical balancing act, where major deals with IT and software giants can often overshadow deals with mid-tier providers. However, neglecting mid-tier negotiations and IT tail spend can expose an organization to unnecessary risks.

According to an article by CIO Dive citing an IT spending study, fewer than half of IT executives said their organizations track SaaS usage to align contracts with software needs. Furthermore, only 35% of companies said they had complete visibility into IT assets and their impact on the business.

This article aims to shed light on the ways procurement teams can effectively manage these less prominent, yet equally crucial, IT agreements to mitigate risks and get better control over tail spend.

Identifying Risks in Mid-Tier Software Vendor Negotiations

While negotiations with mid-tier software vendors may seem less complex than those with IT leaders, they pose their own unique set of risks. These risks may often go unnoticed until they morph into significant problems. Here are some of the foremost risks that companies often encounter within mid-tier vendor negotiations:

• Non-Compliance Risk: Without a dedicated focus on the terms and conditions of smaller deals, companies may inadvertently violate licensing agreements, creating potential legal issues and financial penalties.
• Financial Risk: If smaller contracts are not meticulously tracked and managed, unnecessary spending can quickly accumulate, leading to financial inefficiencies or losses.
• Reputational Risk: Breaches of software agreements not only result in financial penalties but can also damage a company's reputation, affecting its relationships with other vendors and stakeholders.
• Operational Risk: Inadequate management of mid-tier IT contracts may lead to service disruptions, negatively impacting the company's operations and productivity.
• Security Risk: Less-known IT vendors might not have robust security measures in place, potentially exposing the company to data breaches and other security threats.

By identifying these risks in advance, procurement teams can adopt a more proactive approach to manage mid-tier software vendor negotiations, ensuring that no deal, regardless of size, is neglected.

Strategies for Effective Negotiation with Smaller IT Providers

While a lack of time, attention, and resources are often the reasons companies struggle with mid-tier negotiations, many others struggle with a lack of due diligence. This could be because smaller IT vendors don't command as much of the company's IT budget individually, or it could simply be that larger providers occupy the bulk of the procurement departments negotiating focus.

To help, here are some strategies procurement teams can employ to ensure they are getting the best deals, contracts, and pricing in mid-tier software negotiations.

Perform a Benchmark Analysis on Every Software Transaction

Benchmarking is a valuable tool for assessing the fairness of a vendor's pricing structure and establishing a reference point for negotiations. It involves comparing the vendor's prices and terms with market standards or with similar deals made by the company. This approach not only allows procurement teams to detect overpricing but also provides them with solid data to back their negotiation strategy.

Break Down Bundles into Line-Item Pricing

Many smaller IT vendors offer their products or services in bundles, which can often obscure the true cost of individual components. By breaking down these bundles into line-item pricing, procurement teams can gain a more accurate understanding of what they're paying for each component. This transparency can help in negotiating for specific line items and avoiding unnecessary costs.

Identify License and Subscription Options that Fit the Company's Needs

Understanding the company's actual software needs is crucial in negotiations with smaller IT providers. Procurement teams should invest time in identifying the most suitable license and subscription options for their company, considering factors such as the number of users, the frequency of usage, and the required functionality. With this knowledge, they can negotiate contracts that are tailored to their company's needs, thereby avoiding the purchase of unnecessary licenses or features.

Balancing Negotiations Between Larger Providers and Mid-Tier Providers

Balancing negotiations between larger providers and mid-tier providers requires a strategic allocation of resources within the procurement team. Ideally, companies should establish dedicated team or personnel for managing mid-tier negotiations, just as they do for top-tier negotiations.

These dedicated personnel should have a comprehensive understanding of the company's business needs, software usage, and cost-saving objectives. They should also be trained in negotiation strategies, benchmarking techniques, and risk assessment.

By dedicating resources specifically to mid-tier negotiations, companies can ensure that these deals are given the attention they deserve without compromising the focus on larger contracts.

In addition to dedicating resources internally, companies can also leverage technology to manage IT procurement processes more efficiently. For example, they can use procurement software to automate routine tasks, track contracts, and generate real-time data on software usage and expenditure.

This not only saves time but also provides valuable insights that can inform negotiation strategies.

Furthermore, companies can consider collaborating with third-party procurement service providers, who can bring their expertise and resources to the table, thereby freeing up the internal team to focus on strategic negotiations. By implementing these mechanisms, companies can strike a balance between managing their top-tier software negotiations and smaller-scale deals.

Maximize Value in Every IT Procurement Negotiation

No software deal, regardless of its size, should be underestimated or overlooked due to perceived insignificance. By implementing strategic negotiations, dedicating resources, and leveraging technology, companies can mitigate risks and maximize the value of every IT procurement negotiation.

To learn more about how you can prioritize mid-tier software negotiations and get a handle on tail spend, don't miss ProcureCon IT Sourcing 2024. It's happening at Westin Copley Place in Boston, Massachusetts from June 3rd to June 4th.

Download the agenda and register for the event today.