Symphony Consulting, Author at Symphony Consulting

The Disaster Lurking in your SaaS Contracts

Symphony Consulting — Fri, 15 Mar 2024 19:14:10 +0000

Embracing digital transformation has made Software as a Service (SaaS) a pivotal tool for modern businesses. While SaaS contracts offer flexibility, scalability, and efficiency, it’s vital to stay vigilant and aware of potential risks. Poorly negotiated SaaS contracts, whether at the time of purchase or renewal, can strain budgets, disrupt financial plans, and affect profitability. When it comes to SaaS deployments, there are often three major pain points: (1) your pricing increases, at times uncontrolled; (2) you cannot downsize post-deployment or else you lose your bundle discounts; and (3) pivoting to an alternate solution is often not an option due to high switching costs. The end result is that you walk into a multi-million dollar negotiation with little to no leverage.

Here are some approaches to avoid these pain points:

Start Early: Avoid rushing into deals. Begin negotiations well in advance to assess competitive solutions and adjust your environment. For example, with a SaaS solution like Salesforce, where multiple products are deployed across multiple departments, simply assessing your usage, rightsizing, and rationalizing your licenses will take at least 6-9 months, perhaps longer. Using your time wisely and considering all the right factors early lays a strong foundation for future renewals.

Analyze Pricing: Scrutinize licensing models and pricing structures before signing. Pay attention to future price increase terms and strive for transparency of price adjustments. Uncapped price increases at the time of renewal are common in SaaS contracts. Capped price increases solely based on CPI can be dangerous particularly during inflationary periods. Negotiate price lock-in to ensure stability and predictability for your organization’s financial planning.
Think Long-Term: Negotiate longer term contracts for protection against abrupt price hikes that give you a stable cost structure for an extended period. This approach allows for effective financial planning and budget management. Balancing flexibility is key to avoiding unnecessary expenses.
Incorporate Flexible Clauses: Embed termination and renegotiation clauses. These allow flexibility for you to exit or modify agreements in cases of unreasonable price increases or erosion of expected value. Ensure robust termination terms, especially for data access and migration. In a SaaS contract we negotiated on behalf of a client, terms were included to enable continued access to data in an agreed format in case of termination. Additionally, resources were designated at pre-negotiated rates to facilitate data migration. It’s essential to establish and formalize these terms during the initial purchase phase.
Stay Informed: Monitor market trends, competing products and industry benchmarks to ensure fair pricing. Market intelligence empowers you to negotiate better deals and evaluate alternative options if necessary.
Build Vendor Relationships: Cultivate strong ties with SaaS vendors. Communication and regular engagement reveal insights into pricing changes and upcoming plans, aiding budget preparation. These insights help you forecast and prepare for budget changes. In turn, you can offer your preferred partners a strategic view of your IT roadmap, giving them a competitive edge in expanding their business within your ecosystem. In a recent project, our client acquired and deployed a SaaS software that was approaching the end of its lifecycle. Shortly after the deployment, they had to consider a newer, costlier SaaS solution offered by the same vendor, along with the expenses associated with migrating to the vendor’s updated platform. If they had conducted a thorough assessment of their initial purchase and researched the vendor’s future plans, they could have opted to maintain their on-premise system and transitioned to the newer SaaS solution when it became available.

Conclusion

In the dynamic realm of SaaS contracts, mitigating risks from price hikes and shelfware requires proactive management. By starting early, assessing pricing, negotiating wisely, incorporating flexible terms, staying informed, and nurturing vendor relationships, you can safeguard your organization from potential setbacks.

Remember, proactive risk management is the key to ensuring your SaaS contracts remain a valuable asset rather than a financial burden. Contact us to start maximizing your procurement potential today!

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Negotiating Microsoft Licenses

Symphony Consulting — Wed, 31 Jan 2024 13:16:45 +0000

Whether you’ve been a Microsoft customer for an extended period and are considering embracing the AI companion (Copilot) trend or are initiating a new partnership with the tech giant, you might discover yourself entangled in a perpetual loop, attempting to navigate through the terminology, technical prerequisites, choices, license frameworks, and contractual terms and conditions.. Just when you think you’ve decoded Microsoft’s licensing, changes are announced, throwing you back into the spin.

Our team has been negotiating Microsoft contracts on behalf of clients for years and across many industries. In light of this, we’d like to share insights that can prove helpful whether you are looking to renew, restructure, enter a new agreement, or find yourself in the midst of an audit with Microsoft.

Selecting Your Licensing Vehicle: It’s crucial that the contract and terms governing your licenses align with the size of your organization and your licensing needs. Microsoft offers various “Licensing Vehicles” like Open Licensing, Enterprise Agreement, SCE (Server & Cloud Environment), each with its flexibilities and limitations. Understanding these nuances is vital for making informed decisions. Note that selecting a combination of contracts within your corporation may be an option, particularly when the needs of a specific unit differ from the rest of the enterprise. Ensure a solid understanding of Licensing Vehicles and the constraints and advantages associated with each one before deciding on your contract structure. For instance, while the SCE contract offers discounted pricing on Software and Software Assurance (SA), it requires a commitment to full Software Assurance coverage across the installed base of an SCE component. If your organization doesn’t plan to keep a specific environment under SA, SCE might not be the right license vehicle, as the cost of SA will likely offset the incentives of the contract vehicle.

Sizing Your Needs: With Microsoft contracts, organizations often overbuy licenses due to common oversights. Defining requirements accurately is crucial, especially with the myriad flavors of products offered. Organizations may end up purchasing incrementally premium products without clarity on how added features and functionalities align with business requirements over the contract term. This is common with enterprise-wide products such as O365 suites, where organizations enter contracts at optimistic levels, paying for unutilized features months or years before deriving value from them. Remember that you can always true-up and upgrade; however, downgrades and true-downs in mid-contract term are challenging unless these rights are solidified in your contract during original or renewal negotiations.

Server licensing, specifically SQL licensing, poses optimization challenges for companies. Defining requirements, such as Production vs. Test and Development, and virtualization needs, can help license a server for compliance at the least expensive option. When used correctly, developer licenses significantly reduce costs compared to a full server license. Engage a well-versed professional to assist in defining your requirements, mapping them against available options, and setting up a contract structure that offers the needed flexibility.

A well-versed professional who understands these issues can help you with defining your requirements, mapping them against the available options and setting up a contract structure that offers the needed flexibility.

Understanding Licensing Metrics: Whether counting users, cores, or processors, knowing your entitlement and usage as defined by your Microsoft contract is crucial. It’s easy to overbuy and leave dollars on the table or underbuy and expose the organization to audit risks if your understanding of the license metric doesn’t align accurately with Microsoft’s definition. For example, when sizing for O365 usage, many rely on Active Directory (AD) as the user count report; however, AD may not generate an accurate count of your true users, as distribution lists, conference rooms, and terminated employees likely appear in AD but don’t count as users for O365 licensing. Asking the right questions and performing the correct cleanup procedure can help you right-size your Microsoft contract. The server environment requires the same level of detailed attention when it comes to Microsoft licensing. With server licensing moving to a Core-based model and technology shifting towards larger capacity servers, understanding the licensing implications of upgrading a server and how that impacts your license count and Software Assurance costs is essential. Virtualization rights and entitlements can also differ between different types of licenses, adding another layer of complexity to the metrics considered.

Bundle vs. A la Carte Options: To add flexibility to their products, Microsoft offers many options to customers in the form of bundles or an a la carte list of features, especially in the case of user licensing in the cloud. Bundles are a more economical choice only if you have a use case (and a plan to implement) all or most of the features. If uncertain about a functionality and have no plan to implement it, it holds zero value to your enterprise, regardless of how deeply it is discounted. Our team can assist with due diligence and financial analysis of the options available to you.

Transitions from On-Premise to Cloud: If your organization is still using some on-premise products and planning to transition to Microsoft’s cloud offerings, you’ll have a significant undertaking and opportunity to consider. The significant opportunity lies in restructuring your contract as part of the transition. With some leverage during this transition, ensure that your new Microsoft contract has competitive pricing and enough flexibility to accommodate your ramp period. You should never have to pay for both on-premise and cloud solutions, and the contract structure should provision for and align with your strategy over time.

Your Entitlements and Risk of Audit: A Microsoft audit is an unpleasant and time-consuming process that often comes with a significant financial impact on organizations. Clearly defining audit rights and limitations in your contract is essential. The audit clause should also capture the process of remediation should an audit uncover noncompliance. Leaving such terms silent exposes the organization to the risk of paying list price for licenses and additional fees and penalties, including the costs of the audit incurred by Microsoft. If faced with the decision to perform a self-audit or in the case of receiving an audit notice from Microsoft, it’s crucial to engage experts who are knowledgeable and experienced in the field. Defining the scope of any audit, whether limited to a certain product, contract, or region, and understanding the trigger for the audit is vital. As with any other audit, working with Microsoft in good faith is essential, but also ensure that the audit process does not interfere with your business. This is an area where we have helped clients navigate the audit process by determining the nature and format of information that should be communicated and negotiating a reasonable settlement in case of discrepancies.

Azure Commitments: Azure has become a common and significant component of Microsoft contracts with various commitment levels and corresponding tiered discount structure. It is important to size up the commitment so that you can benefit from the additional incentives without leaving money on the table. Try to keep your commitments to an aggregate level to smooth out the peaks and valleys in usage over term. Keep in mind that if you are falling short of your commitment, there are options in negotiating more time or channeling third party software purchases through Azure Marketplace to contribute towards your Azure spend.

Your Microsoft contract is likely among the most expensive and complex of your IT contracts. Because of that, it pays to have an experienced advocate on your side when trying to renew or restructure your Microsoft contract. It’s even more helpful to have someone fighting for you if you are embroiled in a Microsoft audit. If we can be of assistance, please do not hesitate to reach out by contacting us at info@symphonyconsult.com.

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Volume Price Breaks: Are You on the Wrong End of the Scale?

Symphony Consulting — Tue, 14 Feb 2023 16:59:32 +0000

Why should the leader of a supply chain organization worry about something so mundane as how buyers choose the volume price breaks to purchase components? Because it could very well be an easy way to squeeze significant dollars out of the cost of custom parts.

First, let’s align on what we are discussing. Volume breaks (also known as “scale pricing” or “price breaks”) are a common way for suppliers to price products that have significant set-up costs, or in cases where a supplier wants to incentivize larger purchases. For our purposes, we are going to focus on custom subassemblies and build-to-print parts that have a relatively large set-up (e.g., PC boards, PC assemblies, machined parts, plastics, sheet metal, etc.), since that is where you can have the greatest impact.

So how do organizations normally choose between different volume breaks? The short answer is, “not very well.” We have reviewed the processes and policies of dozens of companies, and have found that most rely primarily on the buyer’s intuition. There was a tremendous amount of inconsistency between buyers, and each company had their own slant based on their way of doing business. We were repeatedly surprised at how unsophisticated the tools, policies, and processes were surrounding buyers’ behavior in this critical area.

Let’s look at an example based on a recent client project to see what lessons we can extract. This is a sample of a fabricated part that our client purchased:

Quantity	8	16	32	64	128
Price	$800	$525	$390	$323	$287

Given this information, how do you decide what quantity to buy? How do you determine if the supplier’s pricing is reasonable? What levers do you have to manage cost and inventory? In this case, the buyer was buying 32 at a time, at a price of $390. That seems like a nice midpoint number.

When we analyzed the volume breaks to look at fixed and variable costs, we determined that the lot charge or fixed cost was ~$4,400/lot. Factoring in this information, along with other considerations such as demand volume and stability, storage costs, risk of obsolescence, etc., we calculated that the best solution was to order in quantities of 128 at a time. Although we think companies should be wary of just adding inventory, it was justified in this case. The price dropped by 26%, and offsetting that with the inventory-carrying costs, the net savings were ~20% per year.

Another side benefit of choosing the right volume price break was that it helped optimize the supplier’s capacity utilization. Running smaller-than-optimal lot quantities increased the number of set-ups, and took valuable time away from actually producing components.

The insights we gleaned from this analysis into the supplier costing were even more compelling. We had been in the factory where this product was built and had a good understanding of the labor costs, the costs of the machines, and the changeover time for the component. Even if we used very conservative numbers, the lot charge should not have been anywhere near $4,400. Because we had the data, we had a productive discussion with the supplier and found the disconnect between the pricing and their real cost of producing the component. Based on that, the lot charge was reduced to $1,800, and the best quantity was 80 pieces at a price of $272, leading to a 30% drop in price and a total net savings 25% (factoring in inventory costs). Across the whole category, we saved over 10% simply by making more informed decisions on price breaks and the underlying set-up costs, or ordering costs.

In our experience, buyers generally do not have the right tools or training to make appropriate trade-offs in these situations. Even the most conscientious buyers do the best that they can, but they simply do not have the resources to make better and more informed decisions. By giving buyers access to a tool that can analyze and recommend volume breaks, your company can better equip them to make these decisions. Furthermore, by having a solid process and policy for managing volume breaks in place, you can deliver stronger and more consistent results for your company.

If you are interested in seeing how better processes, tools, and training could help your purchasing staff in this area, please let us know. You can request information by contacting us.

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Renewing Your Salesforce Subscription

Symphony Consulting — Thu, 15 Dec 2022 12:00:00 +0000

Salesforce.com subscriptions are widely recognized as significant expenditures within IT organizations. Salesforce offers a versatile toolset encompassing CRM, partner management, collaboration, performance management, and data management. However, managing costs can be challenging due to factors like over-provisioning, high unit license costs, complex arrangements, and inadequate license asset management.

The deployment of Salesforce across various departments exacerbates the difficulty of presenting a unified front during negotiations, with Sales, Marketing, and IT each utilizing the tool independently in some organizations.

Negotiating with Salesforce involves substantial financial considerations, given its status as a top SaaS solution provider. Preparing for negotiations requires careful planning to maximize the value of expenditures, which is why learning from others’ experiences and seeking expert advice can be beneficial.

Key lessons from our experience in Salesforce negotiations include:

Start Early: Initiate the negotiation process well in advance of receiving the renewal notice. Early evaluations of your portfolio, usage, and future business needs are crucial. Complex renewals may require six to 12 months of preparation, offering better pricing leverage than waiting until the contract expires.

Right-Size and Rationalize: Over the typical renewal period of two to five years, reassess and rationalize licenses to align with organizational changes. Address issues such as ad hoc additions, incorrect license assignments, and lapses in de-provisioning. This ensures a more accurate and cost-effective license structure. In one engagement, we found that our client had purchased Salesforce licenses for users of a third-party platform, not realizing that those third-party licenses do not require an incremental Salesforce purchase. These mistakes are often amplified by poor license asset management practices where licenses are provisioned but they are not re-sized as business needs evolve.

Get the Right Discounts: Determine appropriate discount levels based on your growing volumes. Third-party insights can be valuable in analyzing past spend and projecting future requirements. Adopt a win/win approach in negotiations, considering Salesforce as a strategic partner and assessing what preferential treatment you can offer in exchange for favorable terms.

Develop a Zero-Base Plan: Instead of forecasting incremental growth, start with a clean slate (zero-base plan). Assess user counts in relation to departmental needs, potentially reducing unnecessary license purchases. Evaluate Salesforce add-ons critically to avoid unnecessary expenses.

Consider Plan B: Explore alternative options in case negotiations with Salesforce don’t yield favorable results. While complete migration may be challenging, there are degrees of separation, such as throttling back growth or using a competitor’s product in specific applications. Having a contingency plan enhances your negotiation leverage.

Renewing a Salesforce contract demands careful consideration and preparation. Begin early, validate requirements, use benchmarks, and have a contingency plan in place. If assistance is needed in Salesforce negotiations, refer to our published newsletter or contact us at info@symphonyconsult.com.

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Cyberattacks: Why Are They a Supply Chain Risk?

Symphony Consulting — Tue, 11 Aug 2020 00:00:15 +0000

When supply chain professionals are asked about supply risks, they often cite issues like capacity constraints, component shortages, and quality problems. It is not typical for them to list ransomware and cyberattacks since those are normally considered IT related risks. But in today’s interconnected and system dependent world, any problem that affects the core system infrastructure is going to affect supply.

According to the State of Email Security 2020 report from Mimecast, 51% of the organizations assessed have been impacted by ransomware in the last 12 months, while 58% saw an increase in phishing attacks, and 82% experienced downtime from an attack. It does not take much of an imagination to see how these attacks could become a major disruption to your supply chain. From a continuity of supply perspective, this is no different than a broken tool, a material shortage, or some type of natural disaster that prevents the flow of products out of your supplier’s factory. In addition, if you think of a cyberattack beyond the context of a supply disruption, you soon realize that it can expose your intellectual property and confidential information that is residing on your supplier’s servers. We are aware of two specific instances at our own clients within the past year where a ransomware attack on their supplier created a major disruption that in each case, lasted nearly four weeks before it was rectified.

Given the ever-increasing risks in cyberspace, we believe that supply chain professionals should be considering these issues when discussing risks with suppliers. We understand that you cannot verify that every supplier has mitigated this risk. However, in the case of your high complexity, sole source, or critical suppliers, doing nothing and hoping for the best is also not a reasonable option. Given our years of experience in solving both supply chain and IT problems for clients, here are a few steps you can take to address this risk:

Segment your suppliers. We have stated many times in prior newsletters that not all suppliers are equally critical. When it comes to standard off-the-shelf components that you purchase from a distributor or multiple sources of supply, you can easily pivot to a new supplier when there are shortages. Also, these suppliers tend to have more limited access to your IP and confidential information which means you have more limited risks. But for those small and medium size suppliers of sole-source, high complexity components where the switching costs are high, a different approach is warranted.

Ask them to self-assess their readiness. Asking a supplier to self-assess their capabilities in this space is not a perfect process but it is a good start. In our experience, we have found that most suppliers are honest and transparent in answering specific questions. We recommend asking them to self-assess their capabilities with a brief set of questions that uncovers major gaps and establishes a platform for dialogue and understanding. A supplier that self-assesses itself poorly on basic, high level questions (e.g. do you have information security policies and procedures in place, do you train your employees, etc.) should be cause for concern. It will be important for you to require action from these suppliers as a condition of doing business and to manage – even micro-manage – remedial efforts until you are satisfied.

Take no risks with your crown jewels. As you go through the process of segmentation and self-assessment, you may run into certain critical suppliers that either (a) do not respond to your satisfaction, (b) do not mitigate these risks adequately, or (c) are critical enough to where you need to do your own due diligence. In these cases, it is prudent for you to use your own resources (internal or outside) to conduct an assessment rather than relying on the supplier’s self-assessment. The benefit of doing this is that you have domain experts in the information security space who will ask probing and open-ended questions, assessing the health of your supplier in a clear and consistent fashion.

Include cybersecurity language in your contracts. Nothing gets the attention of a supplier more than actionable contractual language. While your supply agreements are normally focused on deliveries, quality, pricing, warranties, inventory, flexibility, and various other commercial and legal provisions, establishing a minimum set of requirements to protect your IP and confidential information, and mitigating supply disruptions due to a cyberattack are important steps for you to take. Negotiating a contract with information security provisions will give your request visibility at the most senior levels of your supplier and help you gauge how serious and committed they are to addressing this important issue.

While cybersecurity risks are not on the top of the list for most supply chain professionals, it is time to view them through a different lens. With more people working from home and accessing information remotely, the risks are amplified. Most medium and large manufacturers have adequate measures to address information security risks within their own four walls or with their cloud computing suppliers, but few have a good understanding of the risks at their component suppliers and their contract manufacturers, particularly those that are small and medium size.

Given that Symphony has a unique blend of expertise in both supply chain and IT (including information security), we have developed the right tools that can (a) help your suppliers self-assess, or (b) help you assess yourself and/or your suppliers based on a simple, consistent, and uniform methodology. If this is an area that you would like to further explore, please contact us at info@symphonyconsult.com.

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Managing Your IT Spend in a Downturn

Symphony Consulting — Tue, 21 Apr 2020 00:00:15 +0000

During the recession of 2008, one of our clients, a midsize enterprise with 6,000 employees, suddenly realized that a 25% revenue decline was on the horizon. Their CIO wanted to swiftly and quickly reevaluate the IT spend, eliminate waste, renegotiate contracts, rationalize new purchases, and determine how to right-size upcoming renewals. They called us to lead this effort, in close collaboration with the internal IT organization, and in a manner that would not damage supplier relationships. In a matter of three months, we were able to significantly reduce their spend (primarily in software and services) while still preserving their key vendor relationships.

Recent market conditions suggest that we are once again facing turbulent times. The current downturn may be temporary until the COVID-19 virus has been contained or eradicated, or there may be lasting effects for a longer period of time. This means that you will need “flexibility” to scale up and down on short notice and as needed.

As an IT professional, you may not be fully aware of what is fixed and uncontrollable vs. what is variable and flexible. Vendors sometimes tactfully leave you with the impression that a deal is set in stone but experience tells us that you can negotiate especially in times of uncertainty. In this newsletter, we will cover a few tips for analyzing your IT spend portfolio in hopes of gaining efficiencies and reducing cost.

Pareto your spend through a detailed spend analysis

Since the majority of IT non-labor spend tends to be associated with a small number of vendors, following the 80/20 rule is a good place to start. Using Account Payable (AP) reports or contracts data, you can develop a ranked order list of IT spend to highlight the areas of opportunity. The next step is to extract the key metadata associated with these contracts and populate a spend analysis sheet. This can include things like contract term, renewal date, annual spend, auto-renewal clause, termination for convenience language and fees, and for software, all license entitlements (e.g. on-prem and SaaS). Cluster contracts associated with the same vendor. In cases such as Salesforce, for instance, the number of vendor products is generally small. But with some ERP vendors like Oracle and SAP, there may be dozens of products that you will want to assess. Identify which vendors are critical to your business (performance, critical capabilities, enabling technology, etc.), and which ones are not. Through this whole process, you may find that you consolidate spend with a few critical suppliers and others may disappear from your landscape altogether.

Understand your software entitlements vs. usage

We often see a disconnect between the license entitlement a company buys and the license counts they use or deploy. Sometimes they have unnecessary “shelf-ware” and other times they are using licenses well beyond their entitlement. Either situation can be very expensive.

There are several forces that contribute to this problem. At the time of purchase, everyone is optimistic about what can be deployed and software vendors often give incentives, in the form of discounts, to over-buy. Once a purchase is made, and the work shifts to the system administrator, the emphasis is on making sure licenses do not run out. In other words, there is less emphasis, and fewer tools in place, to routinely assess and harvest unused or under-utilized licenses. Finally, there are many forms of an “all you can eat” type of license structure that are promoted by software vendors. This creates a complacency in the management of the licenses which potentially becomes very expensive to unwind or rectify before the next renewal. All of these issues can be mitigated by having a clear understanding of your complete license entitlement and an understanding of your usage.

Right-size your license usage

By digging into the details of what was purchased and where you are underutilizing assets, you can create the foundation for a re-negotiation of your license entitlements. In a recent engagement regarding a Salesforce contract renewal, we asked our client to determine how much of the licenses they purchased were actually deployed. Their impression was that nearly all licenses were deployed to users with little to no waste. As we probed further, it became apparent that based on a “90-day login” report, nearly one third of the licenses were no longer in use. In other words, they needed approximately 30% less licenses than they had purchased and could throttle back their renewal quantity by this amount.

In the case of ERP solutions from Oracle and other software vendors, there may be dozens of product line items, with each one scrutinized and evaluated for usage. In one engagement, our client had deployed a full (and expensive) procurement license to a large number of users across various departments. As part of our analysis, we realized that the full-blown license should have only been deployed to the procurement department responsible for the lifecycle of a purchase order. Management, as well as other departments, only needed the ability to view and approve a PO, which could have been satisfied with was a lower cost license type.

We had a similar story with a client involving Docusign. The client had optimistic views about the adoption and usage of Docusign envelopes. They were about ready to renew their contract with the same counts. By analyzing usage and changing some terms, we were able to cut 25% from their renewal cost.

Assess your compliance and audit exposure

Software companies increasingly rely on audits to generate incremental revenue. Some vendors can contractually back-charge you, with inflated prices and penalties, for use beyond your entitlements. Depending on the vendor and the terms of your contract, they may also require your company to pay for the audit, which can add up to hundreds of thousands of dollars. As such, over-deploying licenses beyond your entitlements can be an audit risk with financial exposure that can be material to your organization. This exposure is hardly ever budgeted and can drain the resources you had set aside for other valuable initiatives within your organization. This subject is described in further detail in our newsletter entitled “Software License Audits: Prevention and Response”.

The key in all of these situations is having a complete picture of what you have purchased and what you are using. Once you find the opportunity, or threat, you need to find the leverage to move the deal in the direction you want.

Get your vendor’s attention and take action now

Every situation is different, but you need to find a way to get your vendor interested in talking to you and taking action. If you are going to save money, it has to come from somewhere. How do you make it in the vendor’s best interest to work with you? In some cases, you can use the promise of future business to entice them. In other cases, you can use the threat and opportunity of supplier consolidation to get their attention. We worked with one client that had five different BI (Business Intelligence) solutions scattered throughout the organization. By letting the vendors know that we were looking to consolidate, they were much more willing to be flexible about existing contracts and were ready to offer a more competitive solution to win the broader footprint.

Another way to gain extra leverage is to adjust timing to align with a critical supplier deadline like fiscal year-end. If you are willing to renew early and start a new contract, you may be able to get the supplier to give you extra concessions in pricing and/or contract terms. That was the case when we helped a client negotiate a SaaS contract before the end of the contract term, effectively swapping unused licenses that were purchased as part of a bundle, and applying the value toward growth of existing licenses.

Conclusion

During these difficult times of economic downturn, it can become daunting to deliver large savings to the organization while still maintaining operational excellence. In order to get quick results, you need to analyze your spend and get insights on the best opportunities. From there it is an exercise of digging into the details, interpreting contracts, understanding usage, and applying benchmarks. Once you have the details, the art of the process comes in finding and exploiting your leverage to drive an advantageous deal.

In our practice, we have a long track-record of helping clients save millions of dollars on their key vendor contracts without negatively impacting service levels or compromising the relationship. If you think we can be of assistance, please feel free to contact us at info@symphonyconsult.com.

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When Your Non-Critical Suppliers Become Critical

Symphony Consulting — Tue, 21 Apr 2020 00:00:08 +0000

In nearly all of our engagements with electronics companies, it is common to see component and subassembly suppliers categorized as critical vs. non-critical, strategic vs. non-strategic, or core vs. non-core. This is based on the premise that there is a small subset of suppliers that supply products and components that are critical to the functionality of the end product or are simply expensive and cannot be ignored. As such, internal resources are allocated toward managing this small base of important suppliers to ensure that the supply chain is tightly managed and that supply is available when needed. It is not unusual to see an electronics manufacturer have nearly 2,000 suppliers, but consider less than 50 of them as critical. This all works well except when a major crisis like a pandemic emerges with no warning.

The COVID-19 pandemic of 2020 has all but upended nearly every supply chain. Small mom and pop shops that bend metal, provide secondary operations such as plating, or simply manufacture off-the-shelf fasteners are shutting down production lines worldwide. Whether you’re missing a $5,000 subassembly or a five-dollar injection molded part to finish building your product, your product shipments will remain on-hold until both arrive. In this newsletter, we will discuss a few strategies you can deploy to avoid being caught off-guard when a crisis lands on your plate.

Segment your suppliers based on risk, not just spend

Most companies agree that not all suppliers should be managed and measured with the same degree of care. Few, however, have a comprehensive approach for determining when a supplier is, or is not, critical. We have seen companies use spend data to establish importance and while this may be one factor for you to consider, it is not the only one. In other words, just because you spend millions of dollars with a DRAM supplier does not mean they should be managed more tightly than a specialty machine shop that precision-machines a component to meet your tight tolerances.

In establishing the importance of a supplier, think about what it would take for you to replace their product should there be an unexpected disruption in supply. What are your switching costs and how long will it take for you to ramp-up another supplier to ensure continuity? What intellectual property do you need access to and do you have the contractual rights to gain access to that technology should you need to pivot to a new solution? During this moment of extreme disruption, we believe you should look beyond spend and focus your efforts based on three factors: 1) Is the part sole-sourced – i.e. only one supplier is qualified to produce the component? Or is it single-sourced meaning there are multiple companies that produce a part with the same form, fit, or function but you have only qualified one? The former is a more difficult situation; 2) Is the part custom and designed exclusively for you? The component could be custom from the ground up or it could be a custom tweak to a standard product; and 3) Who owns the design and tooling? If your supplier is the owner, it can limit your freedom in moving the part in a crisis and narrows the options you have to mitigate risks.

Know the basics about your non-critical suppliers

If you are using the typical model of supplier management and only focusing on your top suppliers based on spend data, how can you truly understand your supply chain risks when you have hundreds, perhaps thousands of suppliers that are unmanaged and left on auto-pilot? If you are like most companies, you will assume that, in general, non-critical suppliers will continue to hum along. That might be a reasonable assumption in normal times but current conditions are far from normal.

The exclusive focus on top suppliers has two problems. First, the process for deciding on top or critical suppliers is fairly narrow. As we described above, most companies categorize suppliers based on the easiest factor to calculate: spend. This leaves a lot of suppliers uncovered and you are likely to find significant risk in the long tail of non-critical suppliers that represent the other 80% of your supply base. You may have to tier these suppliers with more granularity and address risk accordingly. For instance, a non-critical capacitor supplier that is publicly held with transparent financials has a different level of financial risk associated with it than a 100-person, privately held plating shop that has a secret sauce that you need. If you consider these two cases, you may need to dig deeper in order to better understand the plating shop than you do the capacitor manufacturer. Second, if there is a global disruption (such as the COVID-19 virus) that impacts nearly every country and every supplier around the world, you need to have a minimum set of data that you can immediately access for a broader set of suppliers.

We realize that you may not have the resources to actively manage hundreds or thousands of suppliers, but it is important to have some basic information to stay informed on your risks and options. For every supplier in your supply chain, you should have some visibility to two fundamental elements: (1) financial health; and (2) business continuity risk and disaster recovery encompassing both operational and IT readiness. This due diligence is particularly important for all of your sole-sourced and custom parts. If a supplier cannot provide you with business continuity and disaster recovery plans, ask them to develop one under a mutually agreeable timeline. This deficiency at your supplier should be a yellow flag for you but hopefully one that you can overcome quickly through a collaborative approach. If your supplier is privately held and unwilling or unable to provide you with enough detailed financials to give you a reasonable sense of their liquidity, plan your exit or at least implement a robust second sourcing strategy. Our experience has been that most companies do not even have a clear understanding of their critical suppliers when it comes to business continuity and financial health, much less their non-critical ones. Their focus is typically limited to cost and performance with little attention to risk.

Look beyond your contract manufacturers

Since the wave of outsourcing started in the year 2000, companies have become more reliant on contract manufacturers, not only for the manufacture of their products, but for additional services such as service, repair, design, and purchasing of components. That is why most CMs are now called EMS (Electronics Manufacturing Services) providers. This sensible approach has allowed companies to focus on their core competencies and outsource activities that are considered non-core. Among the activities that are outsourced is the management of component suppliers. In other words, if you are like most companies, you have become reliant – perhaps over-reliant – on your CMs to now manage your component suppliers. This is especially true if you are a small or midsize company that has limited in-house commodity management resources and therefore rely on the CM to do all of the heavy-lifting in the extended supply chain.

What CMs do really well is manage the common parts where they have the leverage of buying similar parts for hundreds of customers. What they do not do as well is manage the risk of unique, sole-sourced, and custom parts. Their cost structure and pricing does not normally reflect this and if you rely on them to drive this activity on their own, your company is vulnerable when a major catastrophe like COVID-19 arrives. Managing the risk in your extended supply chain is on you, the manufacturer of the end product, not on the CM. While you may use the CM to gather information (typically for a fee), you have to give the program emphasis and drive the results.

Conclusion

We understand that you cannot “boil the ocean” by suddenly performing an equal level of due diligence on an unreasonably large number of suppliers. However, there is value to be gained from further segmenting your suppliers, understanding where you have risks, and putting together mitigation strategies. At a minimum, make sure that all suppliers can demonstrate that they have a robust business continuity plan and are financially healthy. How deep you decide to probe into these plans vs. accepting their declarations at face value depends on the risk profile associated with each supplier.

With so many moving parts in a fully disrupted supply chain such as what we are facing now, we understand that you may simply not have the internal resources to take on this gargantuan task. At Symphony, we have seasoned supply chain and IT professionals that are experienced in conducting risk assessments and identifying vulnerabilities. If this is an area in which you have a need, please contact us at info@symphonyconsult.com.

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Selecting and Implementing an ERP Solution: Five Key Steps to Getting it Right

Symphony Consulting — Mon, 04 Mar 2019 00:00:47 +0000

An ERP system is the heartbeat of key company processes and the pathway for the flow of information to the people who need it. It can be a daunting task for any company to rip out and replace this vital tool or to install one for the first time. Although you may be forced to take this step for a variety of reasons, it is a significant undertaking for a team that is already fully engaged in running your business. The solution that you select and implement will likely be a 10 -year commitment with little room to correct mistakes down the road. It is a marriage of sorts with the ERP vendor that you choose which means you want to get it right the first time.

Despite its criticality, it is surprising to see how organizations make simple mistakes in addressing fundamental questions before embarking on this commitment. There is no doubt that due to its complexity, every ERP implementation will face glitches and some unpredicted delays. There are just too many variables to expect an ERP implementation to go flawlessly. Having said that, most risks that materially impact your project success can be mitigated through upfront planning, excellent negotiations and contracting, clear focus on key business objectives, and solid project management and executive oversight.

Our experience tells us that there are five key factors that you need to keep in mind when tasked with selecting and implementing an ERP system:

What do you need and why do you need it?

Perhaps one of the most common mistakes that we see in our practice is that companies engage in discussions prematurely with software vendors. This leads them down all sorts of unnecessary paths without understanding what they really want or need. Once there is a perception of a need, phone calls to software vendors begin and before they know it, demos and proposals are flying without a clear understanding of the end game. Before you talk to people outside your company, talk to those inside your company. Find out what problem you are trying to solve or what capability you are trying to enhance. Gauge your readiness and make sure that you have first mapped out the business processes before you begin evaluating ERP packages. You may even find that you do not need a new system after you reengineer your business processes and take advantage of the capabilities your current system provides. Once you have confirmed internally that there is compelling need to move forward, that is when you begin exploring options externally.

Are you choosing the right software?

Go back to the business needs that you outlined in the first step and decide where you need critical functionality from your ERP solution to support your business. Most packages will do a good job on covering the basic needs in finance, operations, purchasing, resource management, etc. but what might differentiate solutions is the ability to meet your more unique needs. Ideally, the functionality will be built into the solution you choose out of the box or through simple configurations. Unless there is compelling business case, try to avoid customization because that will saddle your organization with costs and complexity throughout the life of the solution.

As you narrow the field to a few software vendors that have the capabilities you are looking for, be sure you begin negotiating pricing and terms early in the process and before you are past the point of no return. Do not be enticed by aggressive discount levels and quarter-end pressures. Exercising patience and introducing competition will get you much more value than succumbing to high pressure sales tactics. Also, be cautious of the contract terms and conditions as there are many critical points that you can negotiate to increase value and obtain flexibility as business conditions change. There is no doubt that your plans will change in a significant way during your ERP’s lifecycle and well negotiated contractual terms can go a long way to preserving value.

Is the System Integrator (SI) the right fit for your ERP?

For complex, customized ERP engagements, money spent on an SI for implementation can be substantially higher than the purchase price of the software itself. Of course, with less customization and through the use of cloud ERPs, your implementation cost will be reduced. In almost every implementation, schedule delays and scope changes are a fact of life. The key is how you identify, quantify, rationalize, and approve or disapprove these changes. It is important for you to have knowledgeable personnel who also have the bandwidth to manage the activities of the SI. The SI is an important resource, but you should not assume that you can rely on them to do everything. You must keep the SI and your organization focused on why you decided to purchase or upgrade your ERP package and what problem you are trying to solve. Work with an SI that not only knows the ERP software that you have chosen but one that also has a successful track record in dealing with the specific business issues that you have identified as critical.

The Statement of Work (SOW) that you sign with an SI also has a significant impact on cost and on the behaviors that you are trying to encourage or discourage. A robust SOW should clearly outline scope, deliverables, key milestones with payment tied to those milestones, acceptance/rejection criteria, well-defined roles and responsibilities, selection and retention of key personnel, a transparent cost structure, and a change order framework that is mutually understood and agreed to by you and your SI.

Are you getting a good deal?

Depending on how well you run the sourcing and evaluation process for your ERP selection, you can either pay a premium, pay market pricing, or get what we call an “extreme deal” at Symphony. Research shows that a hasty sourcing process can cause you to pay more than 2X market price. But even market price is what we consider to be a premium. Properly negotiated and structured, a professional who has familiarity with pricing structures can help secure deeper discounts based on benchmarks that are relevant to your business and your industry. Also, a good deal – or in this case an extreme deal – is not limited to just getting a higher percentage discount. It is based on your total cost of ownership over the lifecycle of the ERP platform, including maintenance and support, not to mention contract terms and definitions that represent a significant portion of the non-price value you will receive.

Have you identified and mitigated risks?

As stated previously, no ERP implementation goes flawlessly. It is simply a question of how much risk is reasonable, what mitigation steps you take, and what contingency plans you put in place. For example, we are aware of one company that made a cold-turkey transition from their old ERP system to the new one, with insufficient testing and weak contingency plans. During a weekend, the company turned off one system and turned on the other, assuming that all data had been properly migrated and that the company could now run on its new ERP system. On Monday morning, the system crashed and with no access to data, the company had to delay its financial reporting by over two weeks. The stock was impacted and people were fired. Simply stated, when you do not have a Plan B, you are gambling with your company.

Assessing risk and taking mitigation steps are not activities that you do once at the beginning of the project and call it a day. It is an on-going process and a critical part of project management. Risks evolve during the various phases of your ERP selection and implementation process and as such the plan needs to be constantly refreshed as new information emerges. This should be one of the main deliverables of the ERP project manager whom, by the way, should be laser focused on the project success and not distracted by day to day operational activity.

Summary

An ERP system is the backbone of your company. Before you jump into a new solution, it is important to know what problems you are trying to solve and/or what capabilities you are looking to enhance. There is a lot of analysis and due diligence that goes into selecting the right ERP software and SI, getting the best deal, and mitigating risk through robust project management. Given the impact, it is prudent to invest the time and resources necessary to get good results and to avoid common mistakes.

Helping small and mid-size companies address the issues above is part of our firm’s service offerings. If you think we can be of assistance, please feel free to contact us at info@symphonyconsult.com.

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Can Your Suppliers Survive a Downturn?

Symphony Consulting — Tue, 08 Jan 2019 00:00:10 +0000

As 2019 begins, there are signs that the growth trajectory of the past few years may be flattening and that the new year may be more uncertain. This means that it is prudent to shift from a singular focus on supply and begin to evaluate your supply chain based on risk. More specifically, small and medium size suppliers that have become accustomed to year over year growth may find themselves in a bind if the threat of a slow-down becomes a reality. This could be especially problematic with unique suppliers that are involved in providing critical technology. In one of our recent engagements, we evaluated the financial stress that would occur with different types of downturn scenarios and learned that several critical suppliers would face serious financial issues.

So what you should you, as a supplier management professional, do in order to understand and mitigate the risk associated with your suppliers? How do you get visibility into your supplier’s ability to survive a downturn when there are no signs of trouble in your relationship? And most importantly, how do you get ahead of the curve and deploy mitigation strategies that act as shock absorbers in the event of a downturn? While this topic is too broad to cover exhaustively in a short newsletter, experience tells us that most of the risk comes in three important areas. This is where you should explore first with your key suppliers:

Are they financially strong enough to weather a storm?

The issue of financial strength is more of a risk with smaller, specialty suppliers of high-tech or fabricated components. Due to their niche, these small suppliers tend to become very dependent on a few customers in a certain industry and as such, are much more exposed than those who serve a wider base of customers. It is not uncommon to see one or two customers represent 50% or more of these suppliers’ revenues. As such, it’s important to gain a better understanding of your supplier’s financial health through an assessment. For instance, ask them to share with you how their business is split among various customers and industries. Although this may be sensitive information, most suppliers will share this if they understand the intent and are covered by a non-disclosure agreement. What is their Altman-Z score and how has it evolved during the past few quarters? What trends do you observe in their key financial ratios? How much are they investing in their business and in supporting your business specifically? The key is to look for patterns that may point to stability or spell trouble for you in the long-term.

How effectively do they manage your inventory exposure?

As some supply chain professionals may recall from the past two downturns, just because you do not have inventory in your factory and on your books, it does not mean you are without inventory risks. You may have inventory exposure due to contractual commitments you have with first and second tier suppliers. As companies outsource more work, these suppliers and contract manufacturers are making inventory commitments on their behalf further upstream in the supply chain. With typical reporting practices, you do not know about all of this inventory exposure until there is a shift in the market and it suddenly becomes excess. In fact, during good times, suppliers get into the dangerous habit of building inventory and overdriving the supply chain with cushioned forecasts that expose their customers to unexpected risk.

It is important for you to know your inventory exposure on an on-going basis for two reasons. First, your knowledge of this information will force dialogue with your suppliers and give you a chance to modify their behavior should that be needed. This is a great opportunity for you to clearly understand how your forecasts are used – or misused – in pipelining the supply chain. Second, your inventory exposure can be a critical data point when your product marketing organization decides the timing for product obsolescence. Typically, companies decide to obsolete a product based on market information alone and absent any information from the supply chain. If you have inventory piling up in the supply chain, it may be to your benefit to delay a product obsolescence until some of this inventory has been consumed.

Are they at risk of losing key talent or the “secret sauce”?

If you have a highly specialized small and medium supplier, it is likely that their success is dependent on a few key players. Departure of key personnel from small and medium size suppliers can be impactful especially if they are actively working with your product development and engineering organization on new product introductions. The extreme version of this scenario is when the supplier is highly dependent on your business or that of another customer, and simply cannot continue to operate when there is a significant downturn. In order to address this risk, you may want to take some proactive measures such as requiring that certain information be stored in an escrow account, that specific plans are in place for key personnel, and that you have pre-negotiated intellectual property rights to ensure a smooth transition should something catastrophic occur with the supplier.

As the saying goes, “growth hides all sins” and the growth curve of the past few years has put some companies in the mode of chasing demand and foregoing the normal due diligence in managing their suppliers: supplier discussions are normally focused on near term supply; inventory exposure is an after-thought; and, there is limited visibility to how suppliers will weather a storm. As you begin a new year with signs of uncertainty on the horizon, gaining some peace of mind about your suppliers’ stability may be warranted.

Assessing and mitigating supplier risk is an area in which Symphony has substantial experience, utilizing a variety of homegrown tools. If you think we can be of assistance, please feel free to contact us at info@symphonyconsult.com.

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Are Supply Risks Impacting Your Revenue?

Symphony Consulting — Mon, 22 Oct 2018 00:00:21 +0000

Despite the volatility in the stock market, the underlying economy remains strong and tightening supply conditions continue to impact revenues with dynamics that are similar to 1999-2000. Component lead-times remain long and we are seeing spot shortages and allocation of some parts. In response, OEMs are starting to pad their forecasts and place orders with multiple suppliers in an effort to secure as much supply as they can.

So how do you assess and respond to all of this supply uncertainty? Aside from a shortage report that is generated when their supplier begins production planning, most OEMs do not have any mechanism to identify long-term shortages and lack a metric for identifying how much revenue is at risk as a result. The common mode of operation is for suppliers to simply “load and chase” demand in hopes that in time, the supplier can expedite the delivery of components and materials to complete the manufacture of products on-time. But “hope” is not a good strategy and waiting to act until you have a late delivery puts you in a vulnerable position. OEMs often measure a supplier’s delivery performance against their orders, but this is what we consider a post-performance metric that measures how the supplier “did” in prior months. By that time, of course, the damage is already done.

That is where Symphony’s Misalignment metric comes in. This metric is what we consider to be a predictive metric that looks at supply constraints over a much longer horizon, that is, as far as your (the OEM’s) forecast. The input to making this measurement is a simple report that can be generated by your supplier’s MRP systems, where a component’s “need date” and the supplier’s “commit date” is reported. It is especially ideal for you to use with contract manufacturers or any product suppliers that procure parts and components for your builds. The output of the Misalignment report, which can be customized to fit a customer’s specific environment, is a percentage of misalignments that gives you a heads-up on how much of your revenue could be at risk. For instance, a misalignment level below 5% is what we would consider as “green”, meaning that there are a reasonable number of parts that are in short supply and it is likely that the OEM and the supplier can work to mitigate them. A misalignment between 5% and 10% is in the “yellow” zone, which means that there is credible risk to revenue and that there are a large number of components that are in short supply. A percentage above 10% is what we consider to be in the “red zone”, where there is significant risk to revenue. Given current market conditions, we are seeing misalignments above 20% and in some cases greater than 30%.

While the percentage itself is of interest, the benefit of this tool is multi-faceted:

Early Identification of Specific Problem Parts and Suppliers. One of the key outputs of the Misalignment report is that it uncovers specific components that you and your suppliers need to target for risk mitigation discussions. The ability to influence a supplier to increase its capacity, reallocate production, or authorize overtime to increase production is much more effective if you and the supplier know about the problem six months in advance of the need date vs. six weeks. The common practice that we see in industry is that long-term problems fester while short-term problems are being solved, and the cycle continues. If you can get ahead of the curve by collaboratively addressing problems months in advance rather than days in advance (especially for long lead-time components), the risk of supply disruptions can be minimized.

Early Warning to and Prioritization of Customers. Obtaining visibility to misalignments does not necessarily mean that you can mitigate all supply risks simply because you have visibility to them. There are times when problems are beyond your control, particularly in a market where all other OEMs are fighting for supply. In these situations, you can use this tool to determine which customer orders are at risk and prioritize them based on the importance of that customer. Additionally, you can forewarn customers with a longer notice and allow them to plan accordingly rather than miss a critical shipment with little to no notice.

Resourcefulness to Suppliers. Your suppliers, especially those that are contract manufacturers, face an increasing workload when supply is short and lead-times are stretching. Despite this increase in workload, the resources do not generally keep pace and the supplier’s team can get overwhelmed. This puts them in reactive mode, responding to the fluctuating demand of customers that are routinely escalating and putting pressure to expedite shipments. By providing analytical support like the Misalignment report, you can get a clearer picture of potential problems in the supply chain and can help focus the resources of your supplier to align with your priorities.

Generating a Misalignment report is a simple approach for you to gain visibility into both short-term and long-term supply constraints in your supply chain. It is also a tool that enables dialogue with your suppliers and helps you develop an action plan that you can both understand and support. If you are concerned about continuity of supply and are interested in finding out more about how misaligned your supply chain is, Symphony can help. You may contact us at info@symphonyconsult.com.

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