Introduction
Most financial services companies attempt to reduce their software spend by focusing their efforts on high-spend vendors. For example, a $2.5B insurance company spent six months negotiating on a large enterprise software contract to reduce the yearly maintenance rate of their ERP solution (calculated based on total solution cost) from 22% to 18%. Despite this initiative being successful and driving $500K in savings, the CFO at the financial services company was surprised to learn that the overall spend for the software category showed an increase in the next fiscal period.
A year-over-year increase in spend, despite successful negotiations with high-spend vendors, is a sign that a company’s approach towards software spend reduction lacks comprehensiveness. Along with initiatives directed towards strategic vendors, financial services firms need to design a spend reduction strategy that also integrates an approach for low-spend suppliers. In our experience, an overarching effort towards rationalization can help a financial services firm reduce their overall software spend with the support of procurement strategy.
The Potential for Software Rationalization at Financial Services Companies
In a financial services company, software purchases are made by stakeholders from all departments, including IT, HR, marketing, finance, and procurement. For low spend items, stakeholders typically complete the purchases on their own, without procurement team involvement. A lack of cross-functional awareness during software purchases is fundamentally problematic because it creates redundancies within a company’s technology ecosystem.
Redundant Software Across Business Units
Specifically, it creates a situation where multiple pieces of software perform the same function, each with their own commercial arrangement. Additionally, stakeholders may need the software only for a short period of time, whereas the purchase agreement may stipulate an auto-renewal with payments occurring for multiple periods. In order to identify and mitigate these redundancies, we recommend the following steps:
Implement a Software Asset Management Tool
Software companies are providing tools that crawl the end-user devices of every employee and develop a comprehensive repository of all software assets. These reports also include data points on the type of software, such as business application or productivity software, as well as when they were last accessed by the respective end-user. Given these data points, financial services companies can easily identify redundant solutions and work towards software spend optimization by consolidating them.
Eliminate Shelfware
Shelfware is a piece of software that was purchased and never used. A study, from Flexera Software, found that around 93% of organizations have some shelfware, while more than 30% waste at least a fifth of their software spend on neglected software. While asset management tools can help organizations track shelfware, it is important to understand the root cause to systematically eliminate their presence.
Top Reasons why Companies Accumulate Shelfware
Buying more licenses than required
Companies tend to buy more licenses to either get volume discounts or in anticipation of future usage which doesn't realize.
Audit Compliance
Organizations buy more licenses than they need to ensure that they don't fall out of compliance with licensing agreements in the event of an audit.
Buying Standard Versions
Often, companies buy standard software versions which can induce unnecessary modules which may never be used.
Commitment for Long Term use
To get reduced pricing companies tend to sign longer term agreements for software which may not be used after a limited time period.
Regular monitoring by IT teams and involvement of procurement in all purchase decisions can quickly drive efficiencies and eliminate shelfware systematically.
Create Standardized Procurement Processes
Financial services companies should require that stakeholders follow a standardized process-flow when making software purchases. Such processes should stipulate purchase eligibility criteria, as well as which stakeholders need to be involved when making a purchase. For example, by implementing a simple checklist that stakeholders need to fill out prior to making a purchase, and warranting certain approvals for each spend level, software spend optimization was able to help a leading financial services firm reduce their software spend by $1M in 12 months
Establish clear guidelines for renewals process
Most software contracts, including those handled by financial procurement services, include auto renewal clauses along with annual price increase. In the absence of a formal renewals process, companies are prone to renewing licenses they don’t require, at inflated prices. Setting up a clear renewal process includes getting visibility into contracts and upcoming renewals so that timely notifications can be generated that create enough leeway to plan for a renewal. This time should be used by IT & Procurement teams, including procurement services, to reassess demand, benchmark market pricing, and create a negotiation plan well in advance to maximize potential savings and eliminate waste.
Foster Collaboration between Procurement and IT Strategy
IT strategy teams typically have a holistic understanding of an organization’s current IT ecosystem as well as the future strategy. By collaborating with them, procurement can ensure strategic suppliers and existing software solutions are considered when looking at new purchases. Evaluation of these two aspects, prior to on- boarding new software suppliers, will drive cost PROCUREMENT IT efficiencies.
Conclusion
Overall, an effective strategy to reduce software spend needs to account for high as well as low spend vendors. By implementing the five steps above, financial services companies can optimize their entire technology ecosystem and drive year-over-year savings on their software spend. In addition to this, procurement service involvement in software purchase decisions can also protect financial services companies against inherent cybersecurity risks when dealing with software suppliers. Finally, as software spend and volumes grow with the growth of the business, an effective implementation of these steps will also ensure a smooth and consistent IT experience for employees as well as customers.
