Corporate buyers of IT goods haven't had it so good in a long time. Technology vendors, feeling the pinch after two years of sluggish sales, are discounting their products -- sometimes heavily -- to book new revenues. In many companies, managers are crowing about the price breaks they have won from technology sellers, particularly on purchases of hardware products.
But companies may still be paying more than they should for IT goods such as software, telecommunications services -- and hardware. The price breaks won so far are just the tip of the iceberg; many companies could actually strike better deals, particularly on terms and conditions that, over time, will add costs to technology contracts. Furthermore, many companies still buy more IT than they need, primarily because they have an inaccurate picture of their requirements. Vendors, happy to take advantage of this lack of clear thinking, pocket the excess.
Reversing the tide can save a bundle. During the 1990s, as technology became more essential to running a business, companies spent more and more on IT goods; IT purchasing accounted for 4.11 percent of corporate operating expenses in 2001. While companies in many sectors have capped further growth during the past 18 months, the cost remains quite sizable. Purchases of IT goods typically account for 50 percent of total IT expenditures -- or up to 70 percent when the cost of systems integrators and other service providers hired to help install systems is factored in (Exhibit 1).1
Companies can save 10 to 20 percent or more on what they currently spend for many IT goods by more rigorously managing how much they buy, how they bargain for it, and how they handle their purchases (Exhibit 2). But to wrest these dollars from vendors, companies must make IT procurement a capability, not just an exercise in cutting deals. Many large companies have already developed sophisticated capabilities for getting the most from their direct-goods suppliers. They can now bring comparable discipline to the way they buy and manage IT.
Our analysis of good and bad IT-procurement practices in many industries suggests that companies must take a two-pronged approach to developing top-flight IT-purchasing capabilities. First, they should act quickly to take advantage of the tail end of the buyers' market by reopening existing contracts with selected vendors to demand extra price breaks and to strike better deals on terms and conditions. To prepare for this hard bargaining, IT departments and the businesses they support must work together to become smarter about precisely what is needed, which suppliers to buy it from, and what the best deals look like.
Gains won today, however, will go straight to the vendors tomorrow if these renegotiations are treated just as one-off projects. The second half of our approach, then, is to look to the longer term. Companies must put in place the processes, organizational structures, and support systems to ensure that they will continue to buy only what they need, on the most advantageous terms, across all categories of IT spending.
The complex world of tech buying
Just as technology has become more important, it has become harder to make effective IT-purchasing decisions. The technology and the business requirements it supports are more complex, and buyers must struggle to develop a specialized understanding of both. Globalization too has augmented the problem: when, for example, does a company benefit from consolidated sourcing on a global basis, and when is it better to source piecemeal from a number of national vendors?
Despite these changes, companies generally haven't altered their approach to IT purchasing: the IT manager for software, hardware, or telecommunications generally plays the role of IT purchaser. This seems to make sense; after all, picking the right technology requires a deep understanding of products and the probable evolution of technology. But assessing the technology a company has and needs poses a far broader organizational challenge.
In large part, the problem is that IT-purchasing activities are typically fragmented. The IT organization and IT managers in business units may independently make contracts with the same vendors or buy similar products from different ones, each unaware of what the other is doing. That kind of buying inevitably leads to overbuying. One bank, for example, reduced its overall head count by 20 percent in 2001 but bought 10 percent more PCs than it did in 2000, largely because there was no coordination between the PC-purchasing group and the bank's head count forecasts.
What is more, data on purchasing are often spread out across many sources throughout an organization. Pulling together information on how much money is spent on any IT category -- PCs, for instance -- or even on purchases from a particular vendor can be a nightmare. Without good information, buyers negotiate from weakness: at one company, for instance, they depended on its PC vendor for data on how many machines it leased. That reliance not only put it at a disadvantage in negotiations but also prevented it from working out how many PCs it really needed. Companies also lose when they are lax about managing technology assets: one telecom company that didn't track the PCs and laptops it leased from a vendor discovered that it was paying $4 million a year in penalties on equipment that was returned late.
The broader issues that drive IT-procurement costs -- such as managing demand from business units, policing standards, and tracking assets -- get overlooked if cutting deals is the main consideration. Moreover, companies rarely have clear IT-procurement processes that stretch across whole enterprises. Coordinating these processes helps pull together all the pieces of the puzzle, such as defining ways to assess user demand for new IT goods, developing a company-wide view of preferred vendors, and conducting sophisticated financial analyses of ways to construct purchase contracts. In the void, IT buyers have fewer opportunities to use their data, skills, and clout to negotiate better deals.
Vendors, by contrast, have been doing their homework. They collect and analyze data about buying patterns and noodle new ways to design contracts. They create more complex product offerings. They have well-defined selling processes they continually improve. Their sales reps can count on a host of support functions. So while vendors are giving price breaks today, they are positioning themselves to get the money back tomorrow. Hardware server manufacturers, for instance, are teaming up with enterprise software providers to develop bundled offers -- software configured for and packaged with specific machines -- at what appear to be attractive prices. But down the road, this approach will make it more difficult for customers to switch hardware as well as software and thus will give the vendors leverage in negotiations.
Similarly, for customers with multiyear contracts that have yet to expire, telecom providers are offering lower prices, acknowledging that they have dropped, in return for two- to three-year contract extensions. This arrangement may not be a good deal for customers: vendors offer current rates in exchange for long-term extensions, thus locking in the buyers. Instead of accepting such offers, buyers should negotiate assertively by making credible threats to replace these vendors when contracts expire.
The growing imbalance at the negotiating table between sellers and buyers will be exacerbated if, as we expect, the technology industry consolidates. Fewer and bigger vendors will have greater bargaining power and the resources to further improve their selling skills. Solving any of these IT-procurement challenges will save money today. Solving several of them will ensure constant savings over the long haul. The downturn in IT buying will end soon, and vendors will then be significantly less willing to cut deals that don't excite them. If buyers want to have contracts on their own terms, they need to make changes right away.
Getting a better deal
By taking a broader approach to defining IT procurement, some companies already save tens of millions of dollars annually, beyond any price breaks they achieve by pitting hungry vendors against one another. Besides focusing on how to get good prices from vendors, smart companies address the problems endemic to the fragmented approach to IT procurement -- assessing demand for technologies, sourcing and managing vendors, and compliance with contract terms. No company has put in place all pieces of the puzzle to complete this broader approach, but many have reaped big savings by improving selected areas (Exhibit 3).
Building a world-class IT-procurement capability may take time, but companies can implement some of its elements in a matter of weeks or months and get an immediate payback. They should start by reopening negotiations with selected vendors to cut better deals -- and use this activity to judge their IT needs more precisely. The use of near-term opportunities to lay the groundwork for more complex organizational and process improvements in purchasing can benefit even companies that are good at handling most aspects of IT procurement.
How do you identify which contracts to open and what to demand? The answer lies in viewing IT procurement integrally, in focusing on the total cost of owning an IT product, and in collecting and using the right data to make purchasing decisions and manage the goods. That way, instead of thinking exclusively about prices, managers can ask tough questions about the forces that drive IT-purchasing costs -- such as what technology does the company need as opposed to what it has? Typically, contracts that are ripe for change offer the biggest opportunities to cut the overall cost of items such as PCs. Beyond their price, a company might tally how many kinds of PCs it has and the associated charges for maintenance, parts, peripherals, and so on.