As the daily media drumbeat of “economic downturn” picks up volume, we’ll no doubt be challenged to optimize IT costs and value as we move into possibly tough financial times. So doing better deals and managing vendors better will become much more important for IT organizations this year.
Traditionally, most IT organizations view their technology deals from the bottom up. That is, they tend to have a project-oriented perspective rather than a big picture-oriented overview. While there’s nothing wrong with this approach—especially if it’s coupled with a disciplined procurement process—you may miss opportunities to leverage major negotiating power.
Of course, focusing on a specific deal is important and can add value to the organization. But if you pay attention to only one deal at a time in uncertain economic times, huge cost and risk issues may go unaddressed. It’s the age-old “not seeing the forest for the trees” thing.
If you have to cut costs significantly, you should look at IT spending from the top down, identifying each major spending area. An excellent way to do this is to look at your annual IT budget. The major budget categories—hardware, personnel, software, communications, services and the like—provide a high-level indication of where the big money is going.
Armed with this information, you may be able to find opportunities to cut significant costs and risks and maximize your vendor’s attention. Remember, technology vendors are also under financial pressure and need all the business they can get. They may be willing to cut you a break in order to keep your business.
An analysis of each spending category should include adding up what you spend globally with each of your largest suppliers. You may be shocked at how much bargaining power you have but aren’t using.
Then, review the existing contractual relationships with those suppliers since you may have contractual restrictions such as cancellation fees that have to be included in your analysis. When you’re done, you’ll find opportunities to consolidate spending, leverage your negotiating power, reduce costs and improve contract protections.
After the spending categories have been identified and totaled, they should be prioritized. There are many approaches to prioritization. A simple method involves rating each category according to four criteria: cost, complexity, risk and business need. You can weight each criteria using a 10-point scale to generate a numerical score that can be used to prioritize the opportunities. A 1 would be the lowest rating and a 10 the highest. A category with very high cost, complexity, risk and business need would rate four 10s for a total score of 40. Let’s look at each factor:
- Cost is obvious. Areas of significant spending should receive more attention than the nickel-and-dime stuff.
- Complexity is important because spending areas involving sophisticated, new or unproven technology, or complex business processes should receive scrutiny.
- Risk goes hand-in-hand with complexity because the higher the complexity, generally the greater the potential risk. But risk should be evaluated separately. A category with a low complexity rating could carry a high potential risk. In any event, and in every deal, have your suppliers at least be contractually accountable for nonperformance through clear warranties and sufficient remedies. That’s a great start.
- Business need establishes a relative value of importance of the category’s overall contribution to the business —and the bottom line.
With the categories having been identified, totaled, analyzed and prioritized, the real work can begin. Start with the categories that score the closest to 40 (highest priorities) and work your way down as far as time and reasonableness allow. Focusing on the highest priorities will ensure that your efforts are directed at achieving maximum benefit.
Developing the discipline to objectively scrutinize major spending categories and vendors creates opportunities that would otherwise go unnoticed.
A tough-times strategy to leverage purchasing power, reduce costs and maximize vendor performance goes a long way to answering an economic wake-up call.
JOE AUER is president of International Computer Negotiations Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of High Tech Acquisition Professionals. Contact him at joea@dobetterdeals.com.
Copyright by Computerworld, Inc., 500 Old Connecticut Path, Framingham, MA 01701. Reprinted by permission of Computerworld.