YES! YOU CAN GET A LOWER PRICE! HERE’S HOW:
Bringing True Value to the Business
I went to the Bahamas with eager anticipation. Who wouldn’t? The prospects were a new property
under construction with an opportunity to be involved in the early stages. Everything would be new. No “legacy” infrastructure to work around; no existing design to untangle. Not to mention the allure of living in the Caribbean, on an island, with warm, sunny days the rule. I’m in!
Then, the work began. The budget for IT products and services acquisition was 0.56% of the budgeted construction costs. And that included salaries! Then, about four months in and with less than six months to the scheduled opening, we all received a directive to cut costs – no arguments accepted for exceptions. All of you are probably thinking, “So what? That’s what I face every day.”
Having read many articles about how IT needs to bring value to the organization and that IT, in the gaming industry, does not generate revenue, that it’s an expense – clearly, a herculean effort would be needed.
This forced us to do an in-depth examination about IT procurement and how we measure success for such efforts. Here are a few ideas about how to bring value to your company through procurement:
- Spending less than budget
- Business/deal/opportunity registration
- Technology pricing
Spending less than budget
Budgeting is an interesting exercise initiated begrudgingly by all involved – like preparing your income tax return. Most IT leaders attempt to forecast the business needs for the coming year, develop those
needs into projects that include some rationalization around return on investment (ROI) or strategic initiatives, and then identify the technology components needed.
IT leaders consult with their vendor/suppliers on projected product and services costs even though budgeted expenditures probably will not occur until somewhere between 12 to 18 months in the future, if
at all. Some projects do not make it past the budget review process. Then, as part of the project initiation process, downward pressure on the budget is typically required for approval to start. At the conclusion of
the project, some companies, but not many, will review what was learned: Did we achieve our ROI? Were our assumptions correct? Do the project results meet the planned objectives? Where did we end up
against budget? If we are under budget, great! If not, why not?
The question seldom asked is, “Did we get the best price?” That is because being under budget is the current focus. Thinking about best price can seem so unachievable that we accept a lesser goal. Here is why that is a mistake.
A product number serves as the unique identifier of a product or service. But, often there are several product numbers associated with the exact same product or service. Why is that? Well, that’s because there are different ways to obtain a product or provide a service. That drives different costs to the supplier and so each product number represents all the unique factors involved in bringing a product or service to market. Then, to answer the question about whether we obtained the best price or not depends on which product number was used.
In the chart above, you can see that any given product can have more than one product number (I’ve only shown two) and the price is indirectly associated with the product through the product number. This is done for any number of reasons, one of which I’ve generalized as the source of the product. A supplier will have different costs associated with the way they acquire or manufacture a product. That typically drives a different cost to you, the consumer.
As a separate but related issue, during your discussions with your supplier about your future needs you needed a cost estimate. If you were the supplier, how much leeway would you allow for in the price
estimate? One that gives you the most flexibility to win the business or one that is so tight you can’t provide options? When the person who is supplying the budgeted number is the same person who will provide the product, coming in under budget is, at best, a weak criterion for success.
So, reviewing budget variances is a good exercise but, the best question to ask is, “Did we receive the best price possible?” Remember, staying within budget is really the baseline, the minimum. Obtaining best price possible is bringing real value to the organization.
Many manufacturers choose not to deal directly with the consumer. Think of the auto industry. You don’t typically go to Ford or GM directly to purchase a vehicle but, instead, you work with a dealership which, in theory, adds value to the auto purchasing process by maintaining an on-site inventory, auto preparation, installing accessories, etc. The same holds true in technology procurement. Value Added Resellers (VARs) act as the car dealership. They may hold an on-hand inventory. They may offer volume discounted pricing. They may provide configuration and set up services so your team doesn’t have to do
that. So we typically end up working through a VAR rather than dealing directly with the manufacturer.
But, there is another factor that may come into play that can affect price – deal/opportunity registration. To protect investments of travel and time to make visits to your office and help you decide options or configurations you might need, VARs are allowed to “register” your deal/opportunity with the manufacturer. Then, when you decide on a manufacturer – say, Dell vs EMC for storage needs – the VAR is guaranteed the best price from the manufacturer for that deal. No other VAR will be given a price lower than the VAR who registered the deal. That means when you put the item “out to bid” with three or more VARs, you won’t get a price that is lower than the VAR who registered the deal can get. The
other bidders know this and, although they may submit a bid, they know they won’t get the deal because the deal had previously been “registered” with the manufacturer.
So, did you get the best price?
Everyone knows the speed with which technology is advancing. Moore’s law refers to the doubling of the number of transistors in a dense integrated circuit every two years (think of it as the speed of processors). Some now believe that the doubling of capability is even less than two years. All you have to do is think back to your first cell phone and compare it to the capabilities you have today. On March 13,
1984 – 32 years ago – the first cell phone sold for $3,995. The only thing that device could do was place a phone call. Think about how the capabilities have increased and prices have decreased since then.
Because of the rapidly changing costs in hardware, vendor list pricing on hardware that is more than four months old is useless. That means the quote you received from vendors when you were developing your budget 12 to 18 months ago is useless as well. And, if you’ve gone over budget on hardware acquisition it better be because of quantity increases and not unit price.
The only time I received a written “Atta Boy!” from the President of the company I worked for was when I was able to reduce the costs of IT expenditures. When I asked for assistance from my Purchasing
Department, they declined. They were consumed with other efforts and did not or could not deal with the details of technology procurement. So, I enlisted the assistance of a third party firm that taught me the concepts I have listed above and, utilizing their expertise, together we were able to bring the most value to the table – the best price possible; not just a price below some arbitrary budget. They also added value through employment of their own “secret sauce”, developed over the years, that they apply to
negotiating better pricing on technology procurement. In one deal for infrastructure equipment, we were able to obtain an 88% discount from list price. I can guarantee you no deal existed anywhere that was better than that one. Now, I’ll have to concede there were extenuating circumstances – all the planets aligned – that allowed that particular deal to occur. But, we used all of the concepts above, along with their processes, to affect that deal.
That old saying about working smarter rather than working harder, really applies to technology procurement. If we stay with old concepts and old techniques in an industry that is changing so fast we will miss the chance to prove how IT can bring value to the organization.