What causes even the most cautious CIO to overspend? It's a question that makes CIOs squirm, if not get defensive. Many have taken painful measures to streamline their operations thanks to a decade of cost-cutting mandates. The question also underscores the risky position that CIOs find themselves in today. The role of CIO in many organizations has expanded in scope beyond being the IT authority to being the driving force behind business innovation. These CIOs have oversight over increasingly large IT budgets and are leading projects that are expected to transform not just the business, but the entire competitive landscape.
CIOs realize that the pressure to spend wisely is greater
today than it was just five or ten years ago. That's because the risk of
overspending is directly proportional to the IT ambitions of the business. And
are vendors waiting in the wings to take advantage of CIOs as they embark on
new IT initiatives? Maybe, but it would be unfair to characterize vendors this
way. CIOs need their vendors to be
successful. Companies like Microsoft, Oracle and SAP didn't get this far
without working hard to gain the trust and partnership of the CIO constituency,
and providing solid value to the business.
At the same time, vendors have intentionally made their business models increasingly complex. Smart IT sourcing used to be a matter of how well a company could negotiate discounts. That's simply not the case anymore. How do CIOs get the best deals and the best return on their investment?
- 1. You don't know what you don't know, so benchmark your current IT spending and vendor relationships. If you're not sure if you're paying a fair price for fair terms, you probably aren't. IT vendor pricing is opaque and varies greatly by customer, account rep and region. The first step in preventing overspending is seeing how your vendor's pricing and terms compare against similar products and similar offerings from other vendors.
- 2. Consider a Vendor Management Office or IT Controller position. IT sourcing is a different beast compared to other purchase categories. It requires a unique combination of IT knowledge and strategic sourcing expertise that the average IT manager or procurement manager doesn't have. That's why many best-in-class CIOs have created vendor management offices (VMOs) and IT controller roles specifically designed to optimize IT purchasing.
- 3. Keep pressure on your incumbent to avoid vendor lock-in. Many companies enforce self-imposed vendor lock-in where the incumbent is virtually guaranteed new business or a renewal. Strong vendor relationships are essential, but without pressure to remain competitive, vendors will become less incented to keep pricing, discounts and terms fair. CIOs should apply two kinds of pressure: competitive and alternative. Don't be afraid to bid projects out to competitors or explore alternative solution approaches to keep your incumbent competitive and innovative.
- 4. Forget fixed fees â bid professional services engagements on a time and materials basis. Fixed-fee engagements are rarely fixed, especially with the learning curve associated with many new IT projects. The reality is that overages are common and contractual loopholes are intentionally created to allow for additional costs. The next time a vendor proposes a fixed-fee engagement, bid it out on a time and materials basis.
- 5. Stop overbuying and overpaying for support. Do you really need premium support on all of your enterprise software? Probably not. Could you outsource a portion of your hardware support to a third-party support provider? For most, the answer is yes. By downgrading support levels on non-critical hardware and software, as well as exploring third-party alternatives that provide comparable service, CIOs can reduce support costs by 50 percent or more.
- 6. Know what incentives your reseller is getting. A large portion of enterprise IT is purchased through the reseller channel, where pricing visibility is even more opaque than it is at the OEM level. Not only do CIOs need to benchmark pricing and terms, they should be familiar with the incentives that their resellers are receiving. These incentives are powerful negotiation leverage that can translate into higher discounts and more favorable contractual terms.
- 7. Gain internal alignment before you buy (or renew). Remember that CRM implementation that went awry, and then no one actually used the software? Most CIOs have a horror story or two like this one. In many cases, this outcome is the result of making a purchase that was improperly vetted, and misaligned with the department or organization's needs. Make sure IT has visibility into departmental or organizational needs to better predict costs and make sure the investment is the best choice. Furthermore, keep the IT purchase centralized and closely managed. A decentralized sourcing team or process opens the doors for vendors to approach specific departments and gain leverage in the negotiation process that puts your organization at a disadvantage.
- 8. Stop focusing on price. It may seem contrary to many of the tips shared so far, but price isn't everything. In fact, price negotiation is only half the battle. CIOs have to be experts in how different licensing models impact long-term spending, how product use rights will be interpreted and applied by the vendor, and a host of other factors that contribute to the health of the IT purchase. By focusing on price alone, companies will leave dollars on the table every time. If you are unable to familiarize yourself with these indirect cost factors, find a third-party sourcing partner that can. Failure to arm yourself with this information as you buy and renew IT solutions is not an option â unless you're ready to overspend.
The role of the CIO has entered a new and exciting era â one that finally harmonizes the full potential of IT's impact on business. At the same time, eliminating IT overspending has never been tougher. The playbook has changed. Understanding how to apply the new rules that govern IT sourcing is crucial â but it's also empowering. Every dollar of wasteful spend eliminated from the enterprise is a dollar that can fuel even more innovation.
Jeff Muscarella is executive vice president of information technology at NPI (www.npifinancial.com), an IT and telecom spend management advisory.