How to Avoid Overspending on IT Purchases

By Kim Addington

Chief Operating Officer, Client Services, NPI

July 11, 2019

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Despite all of the advancements in IT sourcing (we’re looking at you, SAM!), and despite the pricing transparency promised by an increasingly cloud-dominant IT infrastructure, IT overspending is still rampant across the enterprise sector. NPI’s visibility into IT spending patterns across nearly 500 enterprises indicates that companies overpay for 75 percent of IT purchases, particularly in the software and telecom categories. Furthermore, the margin of overspend per IT purchase is pretty significant – 15 to 30 percent is commonplace.

In a world where there is no shortage of IT sourcing tools, workshops and methodologies, what gives? Why is this still a problem?

NPI CEO Jon Winsett sheds some light on the issue, but here’s the short answer. There’s no “Kelley Blue Book” to validate fair market value for an IT purchase. Vendor licensing, subscription and program choices are exceedingly complex. So are a company’s business and user requirements. And, just when you get a handle on them, they change.

To eliminate IT overspending, companies must first validate they’re paying a fair price for their unique purchase requirements. And that can only be done through IT price benchmark analysis.

What is IT Price Benchmark Analysis?

The concept of price benchmarking is nothing new. As consumers, we do it all the time. After all, it’s not hard to compare the price of a refrigerator model these days. By the time you make a decision, you probably know exactly what Amazon, Best Buy, Home Depot and/or a local brand dealer is charging.

Unfortunately, IT buying isn’t that simple. There is wide disparity in the prices paid by customers – in part because inconsistency is a category behavior, and in part because there are several more dynamics in play including:

  • Size and scope of purchase
  • Size of your organization and IT roadmap
  • Current spend with vendor
  • Vendor’s footprint within your organization
  • Current vendor sales focus – which SKUs are they highly motivated to sell?
  • Competitive landscape
  • Purchase timing and commitment duration

A fair price for, let’s say, a Microsoft or Oracle purchase differs from one customer to the next. A per user or per device cost can change significantly based on volume of users/devices, duration of contract, bundling, the willingness to purchase a new offering where the vendor is looking to gain market share (e.g. Microsoft Azure).

IT price benchmark analysis weeds through these complexities. It analyzes vendor pricing in the context of your specific purchase requirements and compares it to that of similarly scoped purchases that have received best-in-class pricing and discounts, and defines a recommended pricing target. From there, companies can establish a negotiation strategy, and align the buying team toward that objective.

NPI SmartSpend for IT Buyers™

The challenge with IT price benchmark analysis is that most companies only have a historical view of what their organization has purchased (and how much they’ve paid) with a particular vendor. They don’t have a broad market view of what other companies are buying and what they’re paying for those purchases.

To fill this gap, many companies turn to third-party intel services like NPI. Our NPI SmartSpend offering makes it easy to determine fair market value pricing for IT purchases. Simply submit your IT purchase quotations for review as they occur. NPI will analyze each purchase and promptly send your IT buyers a customized Fair Market Value (FMV) Report with information you can leverage during vendor negotiations.

Each FMV Report includes:

  • Price benchmark findings – Analysis of how your quote stacks up against best-in-class benchmarks
  • Precise savings targets – Recommended price and discount targets to aim for given the purchase volume, timing and other relevant factors
  • Business term recommendations – Recommended changes or additions that will strengthen the deal; includes short-term and long-term considerations
  • Vendor-specific negotiation intel – Insight into vendor and channel motivations, levers and behaviors that enhance your negotiating position

If you’d like to investigate further, you can request a free sample FMV Report.

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