360°IT Blog

At a time when cost reduction is reportedly a priority for many organisations, one popular tactic seems to be to invite suppliers to tighten their belts and pass the savings back to you - or, to put it more bluntly, to reduce their profit margins and renegotiate a cheaper contract.

Everyone is familiar with the adage "you get what you pay for" and it's well documented that suppliers pressed beyond a certain point (usually regarded as the "making an acceptable profit" point) will retaliate in the only way they can - by reducing the level of service they give to their customer. This may take a number of guises - not paying you such close attention, delivering a poor service, taking good people off the account... the list goes on.

Equally, most CIOs understand the value of benchmarking so that they can get a good comparison of their costs (especially in the infrastructure arena) against those of other, comparable, organisations. That's all well and good for existing systems and services. But what about the new stuff? It's challenge enough to get would-be users of the new system to describe their business problem in enough detail to draw up a decent scope and set of user requirements, but how do you assess the prices that come back in the tender responses?

All too often, the price is considered only in the context of the cost/benefit analysis that forms part of the business case you have to write in order to get the appropriate approvals (i.e. for finance to release the funds, procurement to sign the contract, the relevant business director to agree it's what his team needs to function better).

Take the case of a new, all-embracing sales management system. Who is to say the quote of £20 million from the vendor is a good price? Why not £15 million, or even £12 million? The business case simply looks at the money to be paid out and the business benefits to be accrued (at some time in the future, with a fair wind to drive them!). If the answer is positive then it's all systems go. (To be fair, some organisations get a bit more sophisticated and set a minimum cost/benefit ratio of, say, two or more.)

If only the CIO would instigate some market testing then I'm convinced that many organisations could achieve much better prices and value from their investments. I'm not talking about competitive tendering here, but actually finding out what a 'right price' should be before going to tender. Is anyone doing this, or it is all too difficult?

Denise Plumpton is non-executive director of 360°IT

Tags: vendor relationships, service levels, cost reduction, benchmarking, cost control, tendering, market testing, squeezing suppliers, pricing

The 360°IT Blog is part of the new 360°IT event, taking place on 22-23 September 2010, Earls Court, London. Tackling the business issues that drive the implementation of IT infrastructure, register now for free entry to 360°IT