As the industry’s top technology suppliers continue to innovate their products and their sales strategies, they keep winning the battle over the value of their solutions. As a result, buyers need to rethink the old ways of doing business and look to drive innovation into how we compete against these suppliers. To truly create lasting value and defeat IT inflationary tactics, we need to marshal supplier relationships, and execute the fundamentals of managing leverage in deal making.
IT inflation is well underway, and in many of our clients’ existing contracts, it's all but guaranteed. The fact is that suppliers write their agreements to ensure they can consistently extract more money from their customers every year. There are several other factors that underpin this inflation: every organization we talk to is undergoing massive transformations, either through mergers and acquisitions (up 64% last year), cost takeout activity, digitization, migration to the cloud, and various other initiatives. All of this provides opportunity for suppliers to inflate the cost of their solutions and challenge our ability to sustain our businesses.
By design, the suppliers’ innovative models are hard to contract for – internal engagement processes are getting sidelined, and every buyer we talk to is struggling with internal alignment. We’ve seen that the need to go fast is overriding the need for due diligence, and that suppliers’ sales teams are ready and able to capitalize on this. The cloud – with its promise of speed, agility, and scalability - has helped suppliers move perpetual licenses to term-based agreements, which more effectively locks in revenue streams and renewals.
The steady drumbeat of inflationary forces is playing out across all IT sectors, and as a result, the suppliers are thriving. IT spending is up 20% over the past two years. About one quarter of this spending goes to the top thirty suppliers, so this is a good place to focus cost takeout and mitigation efforts. Here’s a snapshot of what we’ve seen across client deals in the last calendar year.
Recent Inflationary Tactics Observed
The top vendors – your key strategic partners – have launched a barrage of tactics to perpetuate IT inflation: they supply the customer demand model, offer reduced discounts, sell directly to the business units, prevent downsizing, offer bundles with no price transparency, force customers into subscription agreements, ramp up audit activity, roll out license changes to force price hikes, introduce ever more complex custom metrics and ambiguous contract language, omit renewal rights, force increased commitment level year over year, provide zero flexibility – the list goes on.
It may appear random, but these are all part of the suppliers’ highly orchestrated, well-designed campaign to embed their solutions and consistently grow revenue.
IT Supplier Driven Cost Inflation
Here's a simplified graphic that summarizes IT inflationary forces we’ve observed:
We're dealing with a double-edged sword: the technology that enables the speed and the transformations creates vulnerability, due to the customers’ inevitable dependency. Someone has to navigate the organization through this process and achieve a delicate balance: to protect the viability of these new business models and deliver the needed solutions that everyone is pursuing.
We believe that that someone is the IT deal maker. This is the person that will face off against the suppliers’ sales systems and lead the business through these seismic transformations. This is the person that is increasingly being viewed as a competitive asset. This is the person the business will look to as a true strategic partner. IT deal makers proved this during Covid-19. They now have the opportunity to take a seat at the table, to play the part of trusted advisor to business stakeholders and secure the technology that enables everything the company is trying to do.
Top Challenges Sourcing IT
But in addition to IT inflation, here's what they’re up against, according to a recent survey we conducted:
Do we have the tools to address these challenges? Do we have the right operating models, the right skill set, the needed expertise to redesign our approach? The good news is – we do. We built out the Leverage Management Maturity Model (LM3), and we've put this set of fundamentals to the test. Together, we've used these fundamentals to align stakeholders and change behaviors to compete effectively against suppliers and generate value.
Together with our clients and our executive advisory board, we've changed the way people think about supplier economics and the path to improve them. We invite you to learn more about the LM3, and download the recording of this presentation here or contact your representative at Accenture.