What Is “Fair Market Value” When You’re Buying Enterprise IT?

By Kristian Tuinzing

Client Services Manager, NPI

September 05, 2017

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What is fair market value (FMV)? It’s certainly integral to what we do here at NPI - let’s dig a little deeper.

“Fair market value” is a term used in many fields, IT purchasing included, to describe a ‘fair’ price in a market. The IRS defines FMV based on precedent case law from United States v. Cartwright, 411 U.S. 546 (1973). While this case deals with mutual funds and touches on real estate valuation as well, many of the nuances apply to IT sourcing in an identical manner.  

The decision in the Cartwright case led to how the Code of Federal Regulations defines FMV, stating “fair market value is the price at which [property changes] hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” {26 C.F.R. sec. 20.2031-1(b)} 

There are some interesting concepts embedded in the definition. In the IT market, “compulsion to sell” is in the eye of the beholder.  Of course, the vendor is always highly motivated to sell – sales reps have to make quota and they would tell you that’s a pretty motivating compulsion! But sometimes the buyer is even more motivated to buy. A customer’s internal timing pressure is one area vendors try to determine during negotiations as early as possible, and they’re skilled at using that to their advantage. For example, in categories like storage, vendors know that when a customer hits their capacity limits free will is removed - their data needs hold them captive and they have a compulsion to buy.

The third clause in FMV’s legal definition is where things get especially hazy in the IT market. A “reasonable knowledge of relevant facts” is an area where IT buyers can be at a disadvantage when it comes to knowing whether they are getting a fair price. The IT market is notoriously inconsistent in pricing, and it’s hard to find “comparables” to guide the assessment. 

The good news is that IT buyers can now get access to price benchmark analysis, along with vendor-specific negotiation messaging to influence a vendor’s willingness to do a deal at a fair price that’s consistent with peer purchases in the market. This is an important element of having “reasonable knowledge of the relevant facts.”

As we work with clients at NPI, we see that enterprises have a variety of buying personalities. Some organizations want to be sure their purchases are in line with market – FMV for them is making sure they are in line with the averages. Some want to aggressively push for best-in-class deals – every time, or just for the largest deals that represent the bulk of their spend. These clients want to push the envelope, and are able to accommodate the time and energy that adds to buying cycles. In all cases, they find that price benchmark analysis helps them eliminate vendor over-charging, and stretch their budget across a wider array of projects.