The 2013 CIO Playbook: How to Stop Overspending

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 – 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 – unless you’re ready to overspend.

 

The role of the CIO has entered a new and exciting era – 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 – 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.

 

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