Strategic procurement vs ad-hoc purchasing
SaaS procurement for your business is not about purchasing and receiving the software. Without strategic procurements, ad-hoc purchases would have you overpaying for SaaS and leave little room for negotiations. Hidden SaaS costs knock on your door and diminish your company's ROI on SaaS investments.
Although used interchangeably, procurement and purchasing have their distinctive differences. Knowing them will help you pay closer attention to cost savings, supplier selection, management, negotiation, and risk mitigation.
This article aims to gently place a finger on the best practices to improve your business's purchasing and procurement workflow in 2022.
Scroll down to find :
- Procurement Vs purchasing - a sneak peek
- What is purchasing - definition and process overview
- What is procurement - definition and process overview
- What is the difference between procurement and purchasing?
- How to perfect your procurement and purchasing process in 2022?
Procurement vs purchasing - a sneak peek
“Procurement is a step higher than purchasing. Purchasing means you just look at the price, while procurement tries to estimate the value you are getting at a specific price point.”
Stefano Bernardi, Co-Founder & Director, Redokun
What is purchasing?
When involved in a software “purchase” you obtain required software from third-party vendors to fulfill your company’s objectives in the most timely and cost-effective manner. The decisions you make are ad-hoc. You focus on the cost and completion of the transaction.
The usual process of the ad-hoc purchase goes as follows:
- If the purchasing manager analyses and approves the software requirement, a Purchase order (PO) is issued to the potential supplier. The SaaS subscription model, payment, and delivery timelines are finalized at this phase.
- Once the PO is issued and confirmed, the employees from the purchasing teams audit the software to ensure that the standards and quality comply with the contract terms.
- The final step involves receiving and forwarding the invoice to the finance department for the transaction.
“The entire purchasing process starts and ends with a transaction and only aims to receive the required service at the right time at the right price.”
What is procurement?
As the SaaS market is growing by 18% YoY, large businesses don’t rely on purchasing alone. The focus has shifted more towards developing long-term relationships with the suppliers.
The procurement process is usually longer and requires the cooperation of various departments within the organization.
For instance, if your company needs email software bought in an annual subscription, the procurement cycle should aim to finalize the budget, meet the requirements, get the fairest deal, meet long-term goals, and continue maintaining a relationship with the vendor.
The typical SaaS procurement process will include:
- Identifying Internal needs: When any employee or department requires software or solution, a purchase request is sent to the procurement organization. This request may or may not be approved depending on the purchase requisitions and resources available. Send your procurement requirements to the Finance team after approval. Have your Finance team determine the budget. Having a clear budget will prevent you from wasting the company's resources.
- Shortlisting Vendors: It's time to decide where to buy the software. For further evaluation, relevant SaaS suppliers are narrowed and shortlisted based on the quality, subscription model, price, risks, reputation, and terms.
- Evaluation of Vendors: The most suitable suppliers are found after the procurement team sends them an RFQ (Quote request) or an RFP (Request for proposal). When the stakeholder receives the quotations and recommendations, the SaaS vendors are compared, based on the price and quality, to get the best quality at a fair price.
- Negotiation: This crucial step involves negotiating pricing, terms, quality, deliverables, and timeline - finalizing the supplier.
- Invoice acknowledgement and payment: A purchase order or contract with necessary information about the purchase, like quality, price, and delivery terms, is signed and issued from the procurement professionals to the preferred supplier. Once the company receives the software, the team audits the quality compliance. Confirm If the contract meets all the specified requirements. Ensure the invoice is issued by the supplier and send it to the finance department for payment.
- Contract and vendor management: The procurement process doesn't end after the transaction. The team evaluates the supplier performance based on promised metrics and contract compliance - deciding whether or not to continue using the software from this vendor. Keeping the records and documents during each process is crucial to keeping an eye on your company's spending.
“ Procurement is a more thoughtful and strategic process that puts efforts into the supplier selection phase and post-purchase evaluation of performance, oriented toward long-term purchasing decisions.”
What is the difference between procurement and purchasing?
Now that we know the process overview of purchasing and procurement let’s dive deep into their key differences that can help you better streamline the SaaS buying process.
- Complex or simple?
The procurement cycle, typically a 7-step process, can be modified for every business depending on the company size, requirement, corporate structure, and supplier. The procurement department needs a dedicated set-up involving more employees and resources than purchasing. On the other hand, purchasing is a standardized process for all types of businesses with very few people - making it more budget-friendly but time-consuming.
- Strategic or ad-hoc?
Strategic Procurement dwells on identifying the root cause, navigating the requirement to multiple departments, and satisfying them with an organized pre-planned process. Purchasing, on the contrary, aims to obtain goods and services only when required -making it more spontaneous and less favorable for the company’s profits.
- Long-term or short-term?
Procurement directly increases the company’s revenue - focusing more on long-term objectives like maintaining relationships with contracted suppliers, decreasing indirect spending, record keeping, performance metrics, and tracking business growth. The procurement team fully indulges in evaluating the list of potential suppliers, negotiating contract terms, complying with the purchase within the budget, and mitigating operational and financial risks.
And, that’s why the whole procurement cycle emphasizes not only the price of the software but also the value, result, and relationships that come along.
Purchasing, being more reactive than strategic, has more instant objectives, like obtaining the right amount of services when there is a requirement - weighing more importance on the product’s price.
Transactional purchasing focuses more on the transaction process and purchase price only.
Whereas relational procurement is more comprehensive, focussing on the Total cost of ownership (cost, volume concentration, contract compliance, supplier relationship, automation, and much more)
How to perfect your procurement and purchasing process in 2022?
Ifeanyi Ojoh, a Global Category manager, in a podcast interview, says that every organization with a procurement team falls in one of the below quadrants:
- The Legacy Procurement ( I quadrant ) - 100% manual with zero automation- is considered the most tiring and outdated form of procurement.
- The Extended Procurement ( II Quadrant) - Aims to develop a strategic relationship with the vendors, but the goods and service acquisition are still manual.
- The Integrated Procurement (III Quadrant) - The procurement functions with related departments like finance. The vendor evaluation, category management, and invoices are still done manually.
- The Cognitive Procurement (IV Quadrant) - End-to-end automation of the procurement process-leveraging disruptive and emerging technologies such as artificial intelligence, information technology, cloud computing, and supply chain management to streamline the whole process in a unified platform.
It would be best to determine which procurement quadrant your organization comes under and slowly evolve your way up.
Now that you know the scope of improvement in the procurement process for your company, let’s look at some ways to boost the efficiency of your SaaS buying process quickly:
Pay more attention to the Contract negotiation - Many businesses only focus on negotiating the price of the software while leaving requirements, use-cases and value on the table.
Streamline the whole process - Invest more in resources to strategize the process rather than investing more in the product itself. The best way to do that is to maintain a record of your previous purchases, vendor lists, contract terms, and prices.
Ease the whole process by automating with a SaaS optimization platform - Intuitive SaaS optimization platforms enable you to make long-term focused, data-driven decisions, improving visibility over spending, streamlining spend management, identifying gaps, and ultimately reducing potential risks- eliminating lots of hidden costs in SaaS.
Pro tip - Spendflo helps you easily manage your procurement, renewals, and upgrades with an intuitive platform -integrating with slack to make procurements easy for you and your teams.
Strategic procurement vs ad-hoc purchasing - do you need both?
Both intend the same outcome, i.e. receiving goods or services at the right price - only the steps, organization, relationships, and results differ. Procurement is more flexible in selecting suitable suppliers and has more advantages in maximizing cost savings, value, risk mitigation, and quality compliance.
But does that make purchasing less important than procurement? - No.
Purchasing is crucial to receive the right amount of services at the right price (mostly).
That is why, when you streamline both these processes, you can prevent uncontrollable SaaS spending and risks and increase your company’s ROI.
Luckily, Spendflo is helping companies, including Airmeet and Crownpeak, save thousands on their SaaS spending through contract management, assisted purchasing, track spending, and a lot more.
Book a free saving analysis for your business now.
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