What is category management?

Category management definition

Category management encourages a strategic approach to procurement focussing on the optimal acquisition of goods and services within specific spend categories. Products or services with shared characteristics are grouped together, enabling tactical procurement and strategic sourcing in line with wider FinOps methodology.

A core category management principle is shifting procurement from a transactional process to a strategic one underpinned by targeted market research, segmentation, spend analysis, supply chain audits, cross-functional forecasting, data analytics, and other best practices.  

By grouping similar products or services, businesses gain a clearer picture of their overall spend patterns and identify areas for cost savings and improved value. In an IT or SaaS context, this could involve managing categories like cloud services, professional services, hardware, or software licenses.

Creating spend categories and subcategories prevents sub-optimal procurement by bringing order to metrics and KPIs with defined templates. This keeps malign characteristics (like unjustifiably high pricing for certain services) from slipping through the net and identifies areas where cost optimization or improved quality might be necessary.

An effective category management strategy starts with creating service or product categories, but the buck doesn’t stop there. As with the wider procurement process, category management is an iterative concept designed to ensure continuously optimal decision-making.

Once segmentation is in place, organizations must undergo market research, strategic sourcing, vendor relationship management, and continuous monitoring via data analysis with defined benchmarks. A cross-functional approach involving all relevant stakeholders is also crucial for success.

The benefits of category management are widespread. Small businesses and multinational organizations alike can enjoy better partnerships, supplier performance, increased profitability, and greater success when it comes to achieving overall business goals.

Essential components of category management

Brian Harris coined the term category management in 1997, creating a strategy specifically for retail environments. Things have changed considerably since then, so his framework is no longer viable – especially in an IT and SaaS procurement context.

We’ve taken the key principles from Harris’ model and updated them for the modern day. An optimized category management process involves several key activities:  

1. Segmentation

Organizations begin by segmenting products or services into relevant categories based on shared characteristics like functionality, supplier type, or risk profile. For IT, this can include anything from security software to APM and CRM systems.

2. Category definition and goal setting

The business must also assign each category a clear purpose aligning with broader business goals, whether that’s cost optimization, innovation, risk mitigation, or other targets. This consequently influences specific benchmarks, metrics, and KPIs to set the foundations for continuous improvement.

3. Past performance and spend analysis

Category managers must analyze historical spending patterns to identify opportunities for cost saving or contract renegotiation. This also ensures service or product assortment optimization for the goals outlined above and informs the market research stage of the procurement process.

4. Market research

Next, procurement teams conduct market research to understand current pricing trends, supplier capabilities, and potential cost savings opportunities within each group. This can also inform future merchandising strategies for retail businesses or prospective SaaS buying in other industries.

5. Strategic sourcing

Strategic sourcing builds on market research, historic supplier performance, and spend analysis. Applying a category management strategy here can significantly improve overall procurement efficiency, helping organizations purchase professional services or products with clear foundations backing up the decision-making.

6. Supplier management and performance monitoring

Category management requires targeted supplier management and performance monitoring, allowing organizations to easily identify areas for improvement or cost optimization. Track performance against the category goals created during segmentation and initial examination to keep optimal supplier relationship management.

7. Stakeholder collaboration and continuous improvement  

Category management is cyclic and must involve regular cross-functional discussions with all relevant stakeholders across an organization. Procurement teams lead the process, collaborating with various departments and business units to ensure alignment with business goals, resource optimization, watertight compliance, and general profitability.

Benefits of adopting category management in IT procurement

IT procurement managers can glean several benefits from successful category management. These include:

• Strategic decision-making – Category management brings order to chaos, allowing for strategic decision-making with data-driven insights from exactly the right areas. IT procurement managers can leverage these compartmentalized metrics to see how specific SaaS vendors influence company productivity and profitability.  
• Targeted procurement – Category management helps procurement target best-in-class vendors for specific needs. As an example, 8×8 pricing can work brilliantly for organizations searching for a single Unified Communications and Contact Center as a Service option (UCaaS and CCaaS). However, Genesys pricing is widely regarded as a better option for advanced CCaaS requirements. Category management quickly allows procurement teams to understand business needs, helping them select a best-in-class option in the right area.
• Enhanced SaaS and cloud visibility – Employing category management to improve SaaS stack and wider cloud visibility is a no-brainer. Segmenting services delivers more efficient spend analysis, identifying underutilized resources and potential consolidation opportunities. The Vertice platform can help here, with unified dashboards providing a holistic overview of key metrics.
• Improved risk management – Category management can reduce software procurement risks, especially for sensitive government agencies like the Department of Defense. The process identifies risk categories regarding specific suppliers or technologies, facilitating informed decisions that comply with acquisition gateway processes and government-wide regulations set by the General Services Administration and the Office of Management and Budget.
• Easier adherence to Cloud FinOps principles – Category management acts as a catalyst for more efficient Cloud FinOps operations. The practise fosters the same cross-functional and holistic attitude to financial operations and offers a simplified approach to cost allocation and chargeback models.  
• Leverage for SaaS negotiation – IT procurement teams gain leverage during SaaS contract negotiation by understanding market trends and supplier capabilities through category management. This empowers them to secure better pricing, contract terms, and service level agreements (SLAs). Want even more leverage during SaaS negotiations? Allow Vertice to handle this with our direct white-glove service. We use pricing benchmarks derived from our partners to ensure you get the most competitive subscriptions possible.
• Logical spend management – Cloud and SaaS spend management is significantly easier with clear product or service groups. Category management allows for granular cost analysis across various SaaS solutions, ensuring optimized resource allocation and cost control.
• Increased efficiency and productivity – Category management streamlines IT procurement processes with a strategic blueprint, freeing up valuable time for wider procurement operations. The resource allocation and consolidation opportunities can also significantly boost productivity, leading to notable improvements in your bottom line.

Category management best practices

An effective category management strategy must involve the following best practices:

• Clear categories – The process starts with clearly defined categories based on functionality, supplier type, risk profile, and other characteristics. Ensure the categorization is decided accurately and logically with clear benchmarks for each group.
• Data-driven tracking – Leverage data analytics services to track category management at all stages. This involves analyzing historical spend data, market research, supplier performance audits, and more.
• Consistent evaluation – Consistently review product and service categories to ensure optimal productivity and categorization. Monitor performance data, general market trends and your own shifting business needs.
• Value over cost – Cost optimization isn’t solely about keeping spend to a minimum. Always emphasize overall business value over cost when using category management to optimize procurement. Otherwise, you might hurt your bottom line by cutting costs without understanding the implications.
• Consider “shopper” insights – The term “shopper” can be a useful concept for IT procurement as well as retail. When evaluating a new software product, follow the same idea to understand employee preferences regarding factors like user-friendly interfaces.