The popular perception of Silicon Valley is a world of Google-sized perks and “unicorn”-fueled excess, where companies spend lavishly in the name of (often imaginary) growth. But it’s gradually becoming fashionable at more and more venture-backed tech companies to rein in expenses. At my company, Hightail, the transition to this more frugal corporate culture happened just over a year ago.
Although we had raised more than $90 million since the company’s inception in 2004 as YouSendIt, we saw growing skepticism within the investment community (perhaps most vocally by Bill Gurley of Benchmark Capital) about the big-raise/big-spend approach epitomized by vendors in our category, such as Dropbox and Box.
At the same time, we recognized the rapid commoditization of cloud file sharing and the need to innovate to stay ahead of that curve. We set out to build a totally new product, transforming ourselves into a collaboration platform for creative professionals. But rather than assuming we could just continuously raise additional rounds of financing, we decided to fund the transition ourselves. This approach required us to downsize the organization and reduce costs in order to maximize our financial runway and give us space to develop new ideas.
We needed a new culture of frugality at the company. As the only remaining member of the Business Development team, I renegotiated, settled or exited close to 40 partnerships. With much of our traditional business development on hold while we worked on new products, I decided to undertake a similar exercise of restructuring our vendor relationships to see if I could apply the practice of frugality here.
For me, frugality does not mean “cheap”; it means intelligently purchasing the right services at the right terms from the right vendors. When I began examining our vendor contracts, I soon noticed two major issues.
First, many of our contracts were negotiated and managed by individual departments, which delivered mixed results and inconsistent terms. Second, because of our lack of central oversight, many contracts were on auto-pilot – renewing automatically without us being able to reassess our need for the service.
To solve these problems and bring the culture of frugality to our vendor relations, I introduced a number of new approaches. These best practices can be applied at any organization looking to trim unnecessary spending, so here are seven useful lessons that I learned along the way.
1. Centralize and standardize
It may sound obvious, but getting a list of all your commitments in one place helps you understand the magnitude of your issues, which deals to prioritize and how to standardize your approach on terms, communications, etc. across all agreements.
2. Look for patterns
Has there been excess purchasing in one area or absence of necessary services somewhere else? Do you have multiple vendors where one will do or have you noticed certain terms that have become problematic across agreements? Look for those things you want to retain and those you want to eliminate with your vendors, then execute accordingly.
3. Learn a vendor’s services
Before you talk to a vendor take the time to understand each key service or line item, how it works, why it is (or is not) important to your company and the rationale behind their pricing. When doing this, involve the functional experts or customers of these services at your company – have them teach you what you need to know.
4. Document your requirements
Too often, important and expensive vendor agreements are signed without a clear understanding of your requirements. Taking the time to document what your organization needs is incredibly clarifying and helps guide you to the right vendors and solutions and even to question whether a purchase or renewal should happen at all.
5. Investigate your options
Who are your vendor’s key competitors and should you be considering their products? If so, use your requirements list to begin discussions with these other companies. Make it clear to your current vendor the process you are running and the basis upon which you’ll make your selection. This approach should make the vendor work harder for your business and provide you with leverage when discussing a new contract or renewal.
6. Negotiate with civility
Knowing exactly what you need and understanding the competitive landscape gives you an advantage in any negotiation. But civility is key as it keeps discussions even and productive. Forcing an unwilling vendor to meet your demands is not a good long-term strategy. Instead, encourage bi-partisan cooperation toward agreement and lay the groundwork for a mutually beneficial partnership that can last for years.
7. Communicate the savings to everyone
Building an internal culture of frugality is best done by celebrating your successes in expense reduction and making sure everyone knows the part they played in achieving it. This can help make your procurement efforts scalable and, more importantly, fun.
Since implementing these practices, frugality is now akin to organizational “muscle memory” at Hightail. This culture has enabled us to diligently manage our cash and we have consolidated and renegotiated dozens of agreements, saving the company millions of dollars without sacrificing quality or eliminating essential services. In fact, for many areas, we have improved our situation.
Once employees started seeing the results of our culture of frugality, they started thinking about how existing agreements could be restructured, reduced or even eliminated. People have a new sense of pride around this frugal mentality, particularly in how it is helping our bottom line.
Thanks to this cost-conscious culture, Hightail has been profitable for the last year. By continuing to question and clearly understand every purchase and partnership, we will continue to benefit our bottom line and overall business.