Getting the Pyschology in Procurement

The relationship between IT vendors and CIOs is complex. Today’s vendors play an integral and active role in the way that companies innovate, compete and forge ahead. As such, most CIOs want their vendors to be healthy, profitable and successful. Within reason.

The problem is that some vendors cross the line between what’s reasonable and what’s not – and CIOs are growing increasingly vocal about the issue. Pricing and licensing models change frequently. Annual rate increases are often unjustified. Contract terms are difficult to understand, and hidden fees are rampant. Unlike healthcare or banking, IT is a uniquely non-transparent marketplace. What one company pays for software or hardware can be twice as much as the next company.

As a result, even the savviest CIOs and IT sourcing teams pay above fair market value for their purchases and renewals. To avoid overspending, they must navigate around pricing and contracting pitfalls, as well as improve their internal purchasing process. Those CIOs looking to jumpstart their efforts to reduce IT overspending should avoid the most common IT purchasing mistakes, including:

Lack of internal alignment

Take an ERP purchase, for example. If the buying team, which could be a procurement person, a project manager or the CIO, aren’t following the same playbook, one person may unwittingly reveal that a certain vendor is top in the running.  Or, the leak may come from an employee not officially on the buying team, such as a tech support representative. The rule of thumb is this: communication with suppliers needs to be restricted to one or two key contacts & those in the know must sing out of the same hymnbook IT vendors run some of the most sophisticated sales organizations in the world. They are well equipped, well trained and highly motivated to do everything they can to extract revenue from clients. Most vendors have weekly sales (read: negotiating) meetings where they assemble their best and brightest to analyse client opportunities, challenges and objections.   

 Does your buying team dedicate this amount of time? In most cases, the answer is no. As a buyer, it’s tough to match that level of preparation when you’re also managing IT projects, budgets and other day-to-day operations. However, those companies that don’t treat IT purchasing with the same rigor and preparation as vendors will inevitably pay the price. 

Understanding the Vendor Machine

Yes, vendors will even sniff out secondary IT roles to get a read on their standing in a selection process. If the vendor realizes they are winning the business, it may remove any incentive to lower their price or improve their terms in the negotiation phase. This seemingly minor misstep can cost a company millions.

IT purchases are complex and involve multiple stakeholders, and vendors are trained to extract information from any and all of them for their own benefit.

Agreeing to unjustified maintenance and support costs

Vendors, especially software vendors, rely heavily on maintenance and support revenues. They enforce draconian policies that allow them to raise rates without justification, while penalizing any client that wishes to break the agreement. But, that doesn’t mean you have to agree to these terms. Vendors must justify maintenance increases and confirm in writing. Furthermore, make sure you’re signing up for the right level of support. Unless you truly need premium support, explore other options – including third-party support providers that can provide the same level of service for a fraction of the cost.

Failure to audit wireless usage 

Wireless usage in the enterprise has changed drastically. The rise of data usage, the disappearance of unlimited data plans, increased prevalence of BYOD, and error-prone carrier billing practices has made telecom one of the most difficult spend categories to manage. Companies need to execute month-to-month optimization of usage, users and rate plans, as well as audit carrier invoices for billing errors. These tactics have been proven to reduce wireless costs by 20 to 40%.

Poor understanding of new licensing models 

If IT buyers don’t understand licensing options as well as their vendor, they will overspend. It’s not question of if but rather, how much. The challenge is that trends in cloud and mobile computing have forced vendors to change and create new licensing models, with which few buyers are familiar. This lack of knowledge is a grave risk in the purchasing process, and one that should be mitigated before any purchase or renewal is made.Levelling the playing field between buyers and sellers to bring transparency to IT spending falls on the shoulders of CIOs and the teams with which they work. It requires rigor and diligence throughout the IT purchasing and vendor management process, but the effort is well worth the investment in time and resources. For many CIOs, it’s the difference between saving or overpaying millions.

To chat to one the Turnstone Consultants on how they can assist & your team please contact david.brook@turnstoneservices.com or call 020 79364375

Buying IT Sofware: Getting the Right Leverage

Buying IT software, and the deployment and support services that go with it, is a more complex undertaking than any other form of commercial procurement. Some companies have dedicated IT procurement departments, many don’t.

For this reason, the IT department has traditionally led the ‘buying team’, which has suited the major vendors very well, for many decades.

Why? Put simply, because IT staff have tended to be technically skilled with less sensitivity over the commercial arrangements, whilst the vendor’s team are guaranteed to be commercially skilled to exploit this position.

The result is that many IT deals favour the vendor, too many of which then end up as failed IT projects.

Exploitation

To avoid this scenario, what exactly are the requisite skills for negotiating with vendors and drafting successful contracts?

Foremost would be a blend of:

  • Technical, legal and commercial skills
  • Available Time
  • Experience

One thing is for sure, the major vendors always field a team with these three bases well covered.

And when they hear statements like “I’ve run out of patience with the contractual detail, let the lawyers deal with it” or “we need to get on and get implementing” it’s all music to their ears.

Vendor sales teams include commercial, technical and legal experts. Buying teams & IT managers often do not have the time to become legal and commercial experts as well as technical ones.

This can lead to an imbalance in negotiating leverage. Sales teams are regularly trained in IT sales techniques, whereas IT managers rarely gain any formal negotiation training.

Common psychology dictates that defences tend to be raised whenever a salesman is involved, but as most would breathe a collective sigh of relief ‘hard sell’ is history, it’s all about ‘relationship longevity’ these days. A less adversarial, short- termist approach pays dividends when it comes to supplier contracts.

Historically vendors train their staff in subtle sales techniques – from presenting tenders, negotiation, handling contractual risk, pricing and contract management.

Over the decades they have honed these processes for operating in a commercial environment. This has been accompanied by dominance of customers, a marked reluctance to negotiate and a degree of belligerence (“This is our standard contract”). Smaller vendors have often followed suit, on the basis that it worked for the larger vendors.

Playing hard ball with vendors is one tactic, but be sure that they have seen this all before and will have strategies to take best advantage & dodge the proverbial bullet

The Problem

There are between 50 to100 possible negotiation points (PNPs) in the typical software and deployment contract.

A fraction of PNPs relate to the safer ground of technology but far more lay in the commercial terms arena; some in the murkier world of project scope, and surprisingly few are purely legal.

It is the commercial scope of PNPs where there is the most risk and reward for a successful ‘go live’.

The CiPS qualification has nothing to do with technology buying, but does cover the principles of procurement, which apply equally to IT buying. With the comparative amount of failed projects and litigation, one could argue it should apply all the more

The buying team needs the time, the ability and let’s face it, the on-going interest and staying power, to manage all of the PNP’s through to contract signature, for a successful ‘go live’.

 IT Procurement Time Bombs

1. Little relationship between the real world milestones and deliverables on an IT project, and the contract that represents it

2. A feeling among some IT managers that they have to know it all, and cannot admit when they don’t

3. A common ‘buying organisation’ staffed with often over- stretched IT personnel, may lack the available time or experience in commercial procurement.

4. Ill-defined scope, perhaps due to vendor or business inspired haste to conclude

5. A readiness to accept “it’ll-be-all-right-on-the-night” assurances from vendors – assurances that magically never make it into writing

6. Reliance on lawyers: contrary to popular belief, there isn’t that much law in an IT contract, but there are far more commercial terms, which impact directly onto the goods/services being supplied.

7. A belief that a vendor’s standard terms and conditions must be English Law and cannot be altered

8. A belief that because legal have rubber stamped it, the contract makes it easy to sue the vendor if all else fails

9. An avoidance of cheap, proven, off-the-shelf packages in favour of costly, unproven, custom-built software; or worse, the tailoring of a standard proven package

Of course there are degrees of things going wrong and man-traps present in various guises; from overruns, to sackings, to court cases. Plenty of notorious lawsuits have arisen from poorly negotiated contracts.

What’s the Answer?

The appropriate balance of ‘IT procurement expertise, at the right times, for the scale of the project. A hands on facility which compliments exiting infrastructure and ideally harmonises the IT needs with business objectives.

If you’re a big enough company, going to market once a month to choose or contract review a significant spend, it’s worth hiring a professional full time IT procurement specialist.