When we were children, all of us played with balloons. Remember what happens when you "squeezed" one end of a balloon? The air just moves to the other end. Well, that's very similar to what has been happening as procurement professionals have "squeezed" technology providers on traditional cost elements...the industry is creating very clever ways to move cost elements to the other end of the balloon!
Strategic Procurement Solutions often assists leading corporations and governmental agencies in developing Strategic Sourcing cost reduction plans. These strategies identify potential savings in spending categories across each company's enterprise footprint; and, of course, include the challenging category of Information Technology procurement. An important part of our firm's consulting value is to educate our clients on recent and future trends in category-wide pricing which they must be prepared to address...with creative approaches to bidding, negotiating, and contracting.
This article will outline a number of technology changes and pricing trends our readers will be facing as they seek to control the size of the information technology balloon. The information technology world is rapidly changing...often so quickly that corporate IT departments cannot keep up. Key changes which are occurring include...
First, GUI interfaces are morphing into Touch User Interfaces and Next Gen Mobile "look and feel";
Second, internal (or external ASP data center) hosting of applications is being increasingly-replaced by Cloud provider solutions;
Third, personal computers are being augmented or replaced by tablet and smartphone devices. In fact, Antoine LeBlond, Microsoft's vice president of Windows Web Services, recently said that "in 2013, tablets may outsell desktop PCs". Other technology experts conservatively estimate that tablet sales will outpace desktops and laptops by 2019;
Fourth, email and CMS/DMS are being replaced or augmented by social media communications;
Fifth, enterprise technology implementations are being outpaced by consumer selected selections ("Apps"); and
Sixth, databases and warehouses will be replaced by "Big Data" technologies which access data in many disparate systems simultaneously, rather than extract and duplicate the data as in existing methodologies. Big Data allows exponentially more data to be analyzed or used, without having to replicate that data in another system of record.
With these changes in the technology world, providers are being highly-creative about moving pricing to different parts of the "Balloon". While some procurement groups are doing a good job of "squeezing" some parts of the Balloon, other parts are growing rapidly...
Technology Pricing Trend A - Hardware prices continue to decline for standard components. Distributed systems (desktops, laptops, servers, and peripherals) are becoming commodities, and pricing is dropping due to pressure from enterprise and consumer buyers. Today, a business class laptop for an average user costs only $500 - $800 USD (€360 - €719 Euro). That is down from $1,500 USD (€1080 Euro) only five years ago. A desktop can be had for the exact same amount as a laptop...including the monitor. Smartphones cost just half as much as two years ago. A small business server costs between $1,200 - $2,000 USD (€860 - €1430). That is just 80% of five years ago.
Technology Pricing Trend B - Software Pricing Changing Rapidly - As traditional software licensing fees are forced lower by competitive advances in many segments, software providers are becoming very innovative in changing their pricing models. Software-as-a-Service (SaaS) shifts revenue to the provider over sustained time period. Cloud hosting reduces initial implementation costs for customers (and less revenues for technical consultants), but it often facilitates higher sustained solution subscription fees for the provider. Software licensors are also becoming quite innovative in charging additional fees for ancillary access to data stored in their systems, for sharing data with other systems, and grouping functionality in multiple modules which each have a separate price factor attached.
Technology Pricing Trend C - Cost of Technology Services Increasing - Just a few years ago, software maintenance fees averaged between 15% and 20% of the initial license fee. Today, software providers are pricing maintenance services between 20% and 22% of original license costs. The average technology contractor's compensation is increasing between 3% and 7% a year. And outsourced IT services are trending between 3% and 5% as well.
Last year, one of Strategic Procurement Solutions' corporate clients had led companywide negotiations to acquire a new SAP ERP system. In multiple rounds of negotiations, the company's IT and Procurement teams had strongly negotiated licensing fees, installation costs, and ongoing maintenance fees. As a final check, the company's CFO asked one of our firm's leaders (who happened to be onsite doing P2P enhancement services) to review the final draft agreement with the SAP reseller. Strategic Procurement Solutions found an additional $880 Thousand USD in cost reductions in the $4.5 Million "negotiated" package....just by looking for elements of the "balloon" that had escaped the attention of the client's team.
Strategic Procurement Solutions trains procurement groups around the world in our Technology Contracting™ (2 day) onsite workshop. Readers may contact us at Info@StrategicProcurementSolutions.com for more information about this or our other training or online employee skills testing services.
As a staffing resource, we also provide contract and direct recruit candidates to companies needing skilled sourcing, contracting, and procurement professionals with expertise in various spend categories...whether IT, Direct Materials, Indirect Products & Services, etc. in industries like Oil/Gas, Services, Banking/Insurance, Mining, Utilities, Government, Transportation, and Manufacturing.
About the Author - Mark Trowbridge, CPSM, C.P.M., MCIPS is one of Strategic Procurement Solutions founders. His 27 years in procurement leadership began in the Manufacturing, Airline, and Financial Services sectors...culminating in a role leading three-quarters of the strategic sourcing activities, and all of the contracts management responsibilities, of Bank of America (then, the USA's third most-profitable company). During his last two years with Bank of America, Mark's areas of responsiblities delivered a Quarter Billion Dollars in cost reductions. During the last dozen years, Mr. Trowbridge has worked in the consulting field with many leading corporate and governmental clients. His business travels have taken him throughout North America, Europe, the Middle East, Asia, and Malaysia. He is a frequent author on supply management topcs, with articles appearing in publications like Supply Chain Management Review, Inside Supply Management, eSide Supply Management, and Strategic Procurement Solutions' own Best Practices in Supply Management Journal.