Best Practices in Supply Management Journal

56th Edition, September/October 2012

Articles In This Issue
"Information Technology Pricing Trends...Squeezing the Balloon"
"Does Higher Spending Always Get You Lower Pricing?"

 

Upcoming Founder Articles & Appearances:

Mark Trowbridge  wrote an article for ISM eSide Supply Management's June Edition titled "Negotiate Like a Master".  Click here to visit that ISM article site.

Mark will  present a two-day workshop on Advanced Procurement Negotiationsat the (5 Star) Grand Millenium Hotel in Bangkok, Thailand on November 19th - 20th.  Find out more by clicking Link to Conference Signup

Mark Trowbridge will be a keynote presenter at the ISM Services Conference in Tempe, Arizona on December 6th - 7th.

Two interviews with Mark Trowbridge were recently-published by Buyers Meeting Point.  To view each article, you can click BMP Interview #1 Link and BMP Interview #2 Link

Job Opportunities:  We are currently helping clients fill the following SCM career opportunities.  Contact Strategic Procurement Solutions through our website if interested...

-  Business Process Outsourcing Sourcing Manager, Service Sector, Madison, Wisconsin.  Base Salary Between $85K and $110K USD, Excellent Bonus and Benefits Package.  Relocation Negotiable.

- Supply Chain Major Project Manager, Western Europe. Global Oil/Gas Company. Must have upstream project experience. Base Salary Between €133K and €163 EURO, Excellent Bonus and Benefits Package. Relocation Negotiable.

 

- Senior Manager of Procurement, Northern California, Financial Services Company.  Base Salary between $120K and $140K USD.  Excellent Bonus and Benefits Package.  Relocation Negotiable. 

 

 

- Sourcing & Contracting Manager, Upstate New York, USA. Permanent Hire Position, Base Salary Between $85K and $110K USD, Excellent Benefits and Bonus Package. Relocation Negotiable.   

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This electronic journal is now distributed bi-monthly to nearly 11,000 Supply Management Professionals around the globe. We hope you enjoy this edition. Feel free to forward to your SCM colleagues!  And keep SPS in mind if your organization ever needs top quality Supply Management Consulting, Employee Skills Testing, Training, P2P Efficiency Reviews, Cost Reduction or SCM Staff Augmentation Services.

 

 

"Information Technology Pricing Trends...Squeezing the Balloon" - by Mark Trowbridge - Principal, CPSM, C.P.M., MCIPS 

 

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. 

 

 

"Does Higher Spending Always Get You Lower Pricing?"- Robert Dunn, MBA, C.P.M.

It has recently been estimated that the world's largest private sector purchasers are:

 

Wal-Mart Stores has approximately $400 Billion USD (€625 Billion Euro) in annual purchases.

 

ExxonMobil has around $310 Billion USD in annual purchases.

 

Chevron spends approximately $160 Billion USD a year.

 

Conoco-Phillips spends around $120 Billion USD annually.

 

Of course those amounts don't even compare with the largest global purchaser, the US government (federal, state, and local), which is estimated to spend between $700 Billion and $1 Trillion USD on goods and services every year.

 

Key Questions - So how does a high purchasing volume affect the pricing an organization receives from the marketplace? Does buying more always result in a lower price?

 

Several years ago, the first and fourth global largest sellers of office & computer supplies merged. One major rationale proposed to the shareholders of the combined entity was that higher purchasing volumes would secure a "lower price for products sold by the enterprise". One of Strategic Procurement Solutions' leaders had conversations with top sales and procurement leaders from the combined company, who admitted that minimal pricing benefits were ever realized from key suppliers. You see, when you are already one of the leading buyers of a particular product or service, optimal price levels may already have been achieved. Just buying more product will not always justify suppliers providing even lower prices.

 

Think back a few years, to when we all learned this in college. Remember learning how to graph Supply and Demand Curves? If you'll recall, the unit price of a given product typically becomes less as higher quantities of the units are sold. But remember that the unit price on the curve flattens out at highest volume levels...? This reflects efficiencies of allocating overhead costs over a larger quantity of production. But at a certain volume level, there is no measurable cost advantage to producing additional units.

 

So how can procurement continue to generate additional savings for their organizations, if volumes have maxed out? One way is by changing what we are buying. Several years ago, Strategic Procurement Solutions was asked by a large client corporation to review their pricing on a key eight-digit value MRO supply category. The company's procurement group proudly informed us that they had bid that spend category three times in the last decade; the last two times using reverse auction technology. During that time, their company had more than doubled in size due to mergers and acquisitions. Their management team frankly did not feel Strategic Procurement Solutions could find any savings.   So we had our task cut out for us.

 

But we started out by reviewing what the firm was actually buying. A careful review of historical spending disclosed that the firm's engineers were insisting on "overspecified" products for various applications. We also learned that the company required the current supplier to provide multiple daily deliveries to key operational facilities, which increased their cost of servicing this firm. Strategic Procurement Solutions worked with the supplier to identify 17% in total savings which would result from simplifying the products and supporting services (the "what") being procured.

 

Strategic Procurement Solutions often evaluates client companies' procurement and supply chain efficiency using our proprietary 360o Supply Management Efficient Review process. Our process takes just a few weeks, and evaluates many factors (including cost reduction opportunities) to identify key benefits for improvement which are presented to the client's management team in a detailed written report.

 

We also have two new spend categories where a FREE cost saving evaluation is performed... Telecommunications and Parcel Freight.  More information can be requested at Info@StrategicProcurementSolutions.com 

 

Robert Dunn, MBA, C.P.M. is one of Strategic Procurement Solutions founders.  His 37 years in procurement leadership covered management positions in the Government, Technology and Financial Services sectors; culminating in a role directing all of BankAmerica Corporation's procurement operations.  He has served as President of two ISM/NAPM affiliates, and taught supply chain management at the post-graduate level for California State University - Hayward and St. Mary's College - San Francisco.  He has worked with major corporate and governmental clients in the consulting industry for the past 18 years.  Robert has worked on major procurement initiatives in North America, Latin America, Europe, and Asia. 

 

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