by Jeff Muscarella

Lessons from the world’s savviest IT buyers

Aug 12, 2016
IT LeadershipIT Strategy

Smart IT sourcing – the kind that prevents overspending and overbuying – requires four types of intel.rn

young woman in glasses standing in front of chalkboard with lots of data
Credit: Thinkstock

What separates the world’s smartest IT buyers from the rest? In my line of work, we see some companies consistently cut vendor pricing by 30 percent or more. But, more often than not, it’s the other way around. Most companies pay 30, 40 or 50 percent more than they should for an IT product or service.

Some people will tell you it boils down to negotiation skills – but I disagree. A fully optimized IT purchase with best-in-class pricing and terms is the result of skillful intelligence gathering in four key areas:

1. Historical pricing and consumption intel

This is a record of what you’ve paid a vendor for specific products and services. Internally sourced, this information helps the organization leverage spend with a particular vendor. It’s also helpful in finding shelfware that needs to be eliminated or unused assets that can be redeployed.

This is one key ingredient, but a lot of customers over-rely on this information to inform their negotiations, and that can be dangerous. Yes, this intel can steer you away from overbuying and add leverage, but it doesn’t help determine if vendor pricing is fair. In fact, as vendors become entrenched in an account, the price tends to go up over time because of lock-in.

2. Benchmark pricing intel

If you really want to know whether you’re paying a fair price, you need to benchmark vendor pricing. This information is used to analyze whether vendor pricing is in line with fair market value in two ways: (1) by comparing their proposed price to pricing offered by that vendor to other customers, and (2) by comparing the their proposed price to pricing offered by other vendors.

Most IT buyers only go halfway in their benchmarking. While competitive pricing analysis is readily accomplished via RFX processes, companies rarely have access to what their peers are paying for similar purchases from a particular vendor.

3. Licensing and subscription intel

It’s impossible for most IT buyers to fully understand the different licensing and subscription offerings available to them from enterprise IT vendors. A vendor like Microsoft has hundreds of SKUs and seemingly infinite permutations. A knowledge gap in this area is one of the surest ways to overbuy and overspend.

Licensing and subscription intel is dual-faceted in that it’s not just about understanding the options available, but also about analyzing them in context. What are my user requirements today versus three to five years from now? How can our usage profiles be utilized to best advantage? Will demand for the solution expand or contract due to seasonal demand, M&A or other factors? How does virtualization strategy impact licensing? Is migration from on-premise to cloud a factor in the shelf-life of this purchase?

4. Vendor behavior intel

Before you negotiate a deal, you need to understand what’s driving your vendor’s behavior. Three critical questions that should be asked are:

  1. What’s motivating the salesperson at the negotiation table? This includes visibility into the vendor’s overall business strategy and sales objectives, as well as more nuanced factors like sales incentive programs and deal approval mechanics.
  2. Where does this particular vendor exhibit flexibility with other customers? For example, if you commit to X number of cloud seats/subscriptions, are they willing to increase discounts on other on-premise solutions?
  3. What is the best way to communicate with the vendor to achieve the best outcome? What’s the ideal way to frame “asks,” what is the anticipated vendor response, and what is the planned countermeasure? This is a chess game, and anticipating how the vendor will play can really improve the outcome.

While some of this intel can be sourced from within the IT buying organization, a lot of it cannot. A company may only buy or renew with a vendor once every two or three years – but that’s a lifetime when it comes to vendors’ changing offerings, pricing, licensing and subscription models.

The truth of the matter is that IT buying in these times practically requires a doctorate-level understanding of pricing, licensing/subscription programs and vendor behavior. In the same way an enterprise keeps legal counsel or retains a CPA to decipher tax code, many companies are turning to third parties to augment IT buying intelligence and strength. Why? Because equipping your IT buying team with these four kinds of intel is one powerful measure you can take against IT overspending.