the needed skills are already part of the accountant’s skill set; they just need to be applied outside of the finance function.
by donny c. shimamoto, cpa, citp, cgma
center for accounting transformation
historically, vendor selection has been primarily driven by operations or it teams. however, recent research by the chief executive group for the cfo leadership council shows that finance teams play a critical role in vendor selection. forward-thinking cas teams should take a cue from these finance teams and broaden their service offerings to help clients be more successful.
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how finance teams support vendor selection
as shown in figure 1 below, more than 7 of 10 finance teams are involved in the final selection of vendors and products. many people often see finance’s involvement as just the final stamp of approval, but the research clearly shows that finance teams are involved throughout the purchasing process.
figure 1 – finance involvement in major purchases
sixty-one percent of finance teams help “identify/agree upon the need or opportunities that require solutions.” this indicates involvement up-front at the initial planning stage before vendors are even involved. this reflects the increasingly strategic role of the finance function. the process often requires that finance work with the subject matter expert for the project area and help them to clearly define the business need, strategic alignment, and vendor comparison criteria and rating rubric.
once the need is established, almost half (46%) of finance teams are involved in searching for vendors, and 51% are involved in exploring available paths. it is important for finance to be involved in this part of the process to help ensure an unbiased look at vendors or products. this is especially critical when there is an existing vendor with whom it or operations already have a relationship. while there may be comfort with an existing vendor, it is in an organization’s best interest to ensure the options available are the best solution and not just what is easily available. through involvement with professional associations, industry associations, or trade associations, finance professionals may also be able to tap into their peers to better understand options similar organizations are utilizing.
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two-thirds (67%) of finance teams are involved in the evaluation/comparison of alternative vendors/products. looking at each proposal through an unbiased lens is important in this phase, too, but probably more important is to ensure that good “apples-to-apples” comparisons are being done for the vendors/products being considered. preparing accurate total cost of ownership (tco) and return on investment (roi) documents is critical—primarily to ensure both present and future costs are considered as part of the roi analysis.
managing vendor selection risks
the research also provided insight into the top challenges finance teams encountered with vendors during the vendor selection process. (see table 2 below.) ninety-four percent of respondents expressed some challenges with a vendor during the buying process. instead of viewing these as deficiencies of the vendors, consider what you can do to mitigate these risks.
figure 2 – challenges experienced with vendors during the buying process
i’ll share some of our team’s strategies for helping our clients mitigate these risks.
- solution doesn’t meet the business need:three of the challenges above are probably due to poorly defined business needs: (1) overpromising and underdelivering; (2) vendor doesn’t understand our business needs; and (3) making assumptions about business processes without verifying accuracy.
creating detailed process maps of existing processes and identifying current challenges helps vendors to understand the way you currently operate and where there are opportunities for improvements. we also often do a high-level visioning of how a to-be process would operate or how we see a solution supporting the business needs. if you do these, be sure to include input from the people who are actually performing the process to ensure that the documented processes reflect what is actually happening, not just what is supposed to be happening according to procedural manuals.
as part of the vendor selection process, we also require vendors to demonstrate how the process would be performed within their solution. this is particularly important for more complex or mission critical processes—so that neither side makes assumptions of how the solution will fulfill the business needs.
- incompatibility with existing systems:half of finance teams experienced challenges with “compatibility with existing systems is difficult to determine.” to mitigate this risk, two things are needed: (1) the it team must provide moderately detailed information around the existing systems that the solution must integrate with, and (2) a solution architecture for how the solution would look once put into place (including how the integrations would function) should be part of the vendor’s proposal. too often we’ve found that it teams are brought in after the solution has already been chosen, or, even worse, after the contract has already been signed.
there is a delicate balance that must be exercised here because you don’t want to get so detailed that you’re actually designing the integrations, but you also don’t want to be so high-level that a lot of assumptions are made that later turn out to be inadequate.
- financial implications not accurately defined: almost half (45%) experienced the challenge of “pricing is not transparent (difficult to understand the true cost of ownership).” to help mitigate this, we provide vendors with a pricing worksheet showing how we want them to itemize their pricing. we often will ask them to break out:
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- one-time hardware costs
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- one-time software costs
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- one-time services costs
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- other one-time costs (e.g. travel, training, etc.)
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- annual recurring hardware costs
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- annual recurring software costs
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- annual recurring services costs
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- annual recurring maintenance or support costs
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- other annual recurring costs
when applicable, we also ask them to identify variable costs (e.g. price per user license) and assumptions (e.g. services cost is based on 5 meetings or up to 100 hours of implementation services). this helps you see potential areas for adjustments and if there are similar underlying assumptions between the vendors being considered. for example, for a budgeting software selection, we saw that two vendors estimated the implementation to take 100 hours; the third estimated 200 hours. we went back to the third vendor to ask why theirs was so high. it turned out that they had included some features that were mentioned during demos, but weren’t within the current requested scope of services. we ended up asking them to remove the excess scope, which brought their proposal costs lower than the other two.
the other thing we do with pricing is analyze costs over the time period of the solution’s useful life—this is to help at least identify the direct elements of the total cost of ownership. especially with cloud solutions and subscriptions, it is important to do a multi-year analysis. these solutions may appear to be cheaper up-front, but when you look at a 3-year or 5-year span, they can cost way more than an on-premises or hosted solution.
cas teams must evolve to be full finance teams
a lot of this may sound like problems for large companies, but my firm works with small and mid-sized organizations, and we see them facing these challenges all the time. these vendor selection and risk mitigation techniques are part of the core advisory services for which clients hire us, and while it may cost the client a little more up-front, i know that our clients are able to successfully surmount the challenges described.
cas teams looking to provide higher value to their clients should look at adding vendor selection services to their service portfolio. the foundational skills needed to do process maps, risk assessments, and financial analyses are already a part of the accountant’s skillset, but they just need to be applied outside of the finance function.
want to learn how your peers are supporting vendor selection and the technologies available to transform finance? don’t miss out on the latest trends, cutting-edge technology, and unparalleled networking opportunities.
join us at the finance & accounting technology expo, oct. 29-30, 2024, at javits convention center, nyc. unlock your free pass to the 2024 finance and accounting technology expo!
