Five percent. Those are the odds that enterprises are paying a fair price for any given IT purchase or renewal if they aren’t performing IT price benchmark analysis. Or, put another way, there’s a 95 percent chance that companies are overpaying during an IT buying event.
Here’s some context: Of all of the IT purchase and renewal transactions NPI reviewed in the third quarter of 2017, only five percent were priced at fair market value as compared to peer purchases in the market. It’s a sobering statistic for anyone responsible for sourcing IT products and services. Just three years ago, that number was closer to 30 percent.
What’s changed? First and foremost, licensing and pricing complexity are off the charts. No real surprise here as this challenge has been plaguing IT sourcing for years, but the impact it’s having on IT purchase outcomes is painfully clear (five percent!). While some IT vendors (SAP, Oracle) have publicly acknowledged this is a problem for their customers, they’ve yet to take meaningful measures to improve the situation. Among our clients, we’re also seeing an acceleration in IT buying – in terms of both volume and pace. Digital and industry transformations are driving more IT buys, more often and more quickly. That’s putting pressure on IT sourcing teams, many of which are already resource constrained.
One conversation I find myself having often with IT and sourcing executives is on the issue of fiduciary responsibility. No one wants to overpay for IT and most sourcing teams take measures to avoid it. They employ negotiation best practices, consult analyst research to validate vendor health and selection, and implement procurement tools and solutions to track spending KPIs.
But these measures are not enough given the current state of IT vendor pricing. Transaction-level price benchmark analysis should be hardwired into every company’s IT buying process. This requires access to external expertise that helps IT buyers answer four key questions:
- Is deal pricing in line with what my peers are paying or for deals of similar size/scope?
- If not, what are specific pricing targets for this purchase to bring it into alignment?
- Does the vendor offer other pricing/licensing/subscription options that would meet my organization’s business and technical requirements for a lower cost?
- What other cost-related business terms are important to optimize for a purchase of this type?
Unless sourcing teams take steps to validate they’re paying fair market value for every purchase and renewal, they must also acknowledge there’s a 95 percent chance they’re overspending. Changing those odds should be a high priority!