My friend and colleague Steve Duplessie over at Steve’s IT Rants just recently wrote about Enterprise customers consolidating vendors. At ESG we have been conducting a Spending Intentions Survey for years and one of the recent outputs is that 34% of enterprise IT operations have a stated corporate objective to “reduce the number of vendors we work with”
Perhaps it is worth looking at the background to Vendor Management and the thinking behind vendor reduction strategies.
Vendors cost money to do business with – each new vendor must go through a fairly complex legal and commercial negotiation to agree Terms & Conditions of sale – T&Cs. This costs money. So simplistic thinking in procurement is that less vendors equals less cost (for procurement administration). However we live in a neat economic – political system called capitalism and that requires the lubrication of competition to work. No lube causes the gears and cogs of capitalism to grind and thrash and we end up paying more money.
Vendor rationalization often has a tinge of the law of unintended consequences about it and whilst we might reduce costs by consolidating from seventeen copier paper suppliers to one, trying to do the same in IT can have short term administrative cost benefits but longer term cost hikes.
In my time running large IT shops, I always had a cardinal law. NEVER issue a Request for Proposal to one vendor, EVER. One vendor deals are poison and without competition, vendors will always take advantage, even the nice guys will take advantage. In IT departments, decisions are often made on technology preferences, vendor A makes better widgets that vendor B – perhaps A is 3.657% better than B, so we must use A – right? Wrong!
Today much of what we buy for our IT departments is over-specified for what we actually need and we techies need to apply balance, if A is 3.657% better but B is 20% cheaper to buy and run, why buy A?
When I ran IT Infrastructure at Cable & Wireless, I needed (NEEDED) to buy a new IBM mainframe. IBM knew that and treated me like a captive customer, I was paying full rack rate, because I didn’t have a choice – right? Wrong!
I worked with one of our clients and negotiated a deal to rent part of the clients mainframe capacity and threw that into a head to head RFP with IBM. The mainframe price came down from $4M fro one system to $1.4M for two systems, plus a ton of free professional implementation services.
Vendor sales teams get bid support from corporate when they are in a competitive deal, prices are always lower, extras become free issue. Competition is a tool of our trade and should be used to drive the best deals.