Global sourcing has become a competitive necessity. With the existence of cut-throat competition in the market, many companies are looking forward to source in low-cost countries. The expectations of more ROI and high competition drive make the professionals look for less expenditure, making a direct effect on the bottom line. At the same time, the businesses have to maintain their service levels and averting from incurring any loss.
The maximum of the companies are eager for procurement solutions in order to achieve the goals mentioned above. Many retailing giants are purchasing products with a much lesser percentage than the products made in developed countries. The industrial players are finding their way to commodities, chemicals, small machining, packaging and more. For instance, a company like Ford Motors has already spent significant effort in source more parts in China, with only a fraction used in the vehicles.
Procurement professionals, founders, entrepreneurs already know how challenging it is to source, negotiate and get contracts. Honestly, the struggle is real! There are numerous deals and contracts signed before both parties agree. The team has focused on implementing digital solution pricing to strategies, source and execute the best digital procurement plan with the rising issues.
Understanding the Problem
If you are wondering why there is such variation in scope, pricing and deployment for procurement solutions in the digital sphere, you need to understand how the cloud-based software works. Previously, you had ‘enterprise software’, but as companies expanded over time, vendor selection cycles got longer and the necessities skyrocketed.
To level up to these standards, customers were told to install pre-cloud solutions on their systems, forcing them to do painful integrations and ensuring that the solutions are supported and maintained. Before using the cloud, people opted for digital transformation, which made the vendor selection process go for years.
The pre-cloud approach has a problem with technology because it increased the risk of failures. As the number of steps increased, it included more approvals. More approvals lead to more significant costs, which lead to more scope and stakeholders. This eventually forced the teams to go ‘digital’, irrespective of the pains involved. To compensate for all the troubles, the teams demanded customisation, including more scope to the vendor selection, resulting in long procurement cycles.
How Can Connecting Procurement Apps Help?
The concept of ‘best of breed’ means you can purchase software as a service. In short, you do not have to make any long-term commitment with a single vendor. Now, procurement teams can buy an array of software connected and hosted to a cloud server. Though you may get fewer features, narrow scopes, it has high rates of adoption.
What is the perk of using this? It has user-friendly interfaces built with user-centric design principles, testers, rapid prototyping and more. You do not get user-friendly interfaces just by chance; you need robust investments. It would help if you had disciplined focus when you are making such developments. However, you need to understand that these solutions cannot do everything. The best features perform fewer tasks but do them exceptionally well.
Nowadays, companies and enterprises are choosing digital solutions, but one should not forget that the technology is used to select vendors, not solutions. This is the core reason why teams are overpaying for digital solutions.
What are the Drivers Behind Digital Solution Pricing?
In cloud-based software, the most popular values are- number of users, number of API calls, number of credits, and number of projects. These units are not the drivers of cost for the digital solution provider. However, technology start-ups are supported by capitalists so that they can attract business models for investors.
Software enterprises generally bestow excellent margins, typically over 90% and the recurring revenue business model helps analysts to forecast predictable revenue from annual customer subscriptions.
What is the Secret to Better Savings?
The two key drivers behind digital solution pricing are:
- the cost of the sale, known in the SaaS industry as CAC (Cost of Customer Acquisition)
- the number of years the company has been in business. Companies with earlier products and faster cycles can offer better pricing across the board.
Henceforth, more procurement teams are paying more for digital solution ideas for transformational ideas. In every step and every approval, the cost is added as per the software industry’s norms. When you get longer cycles, it leads to higher pricing, which means more approvals. Though professionals are trained to save the business from extra expenditure during procurement solutions, the same thing increases the price of the software. Then, the team is forced to pass the cost that has long sales cycles. Plus, the impact of delays can be dramatic.
In a nutshell, if the teams wish to secure business value from digital solutions, they need to rethink the technology process and optimise fewer approvals and stakeholders for a proper business outcome. Well-organized processes will result in better value deals every time.
The approach should be slow and steady, enabling managers to adapt gradually to the new ways of choosing vendors, negotiating with them and minimizing the pains of the transition stage. Logistics conditions, quality assurance and control, and customs regulations are the features that need special attention when direct sourcing is implied. In case of quality assurance and control, a profound assessment of pre-selected suppliers is done. During this analysis, the firms often look to gain more insight into suppliers’ R&D activities, financial stability, due diligence, current client base, production process and quality procedures.
As procurement professionals, you need to maintain a balance between digital solution providers and teams. To unlock all the benefits, you need to work towards fundamental change. Start by leveraging the greatest superpower that is selecting a supplier for your business need. The ‘best of breed’ method to digital revolution creates a ground-breaking chance for procurement solutions, but only if we have these much-needed updates to our technology selection process.