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IT STRATEGY – Hardware, software, buy where?

Buying the wrong system is just one way to waste money in your IT budget. It’s not just the technological issues that arise during the project planning stages; making the right decision about when to buy, from whom and for how much are crucial considerations that can easily cost a company staggering amounts of money if handled badly. The problems of technology selection are mirrored in the number of ways of acquiring IT systems. For example, while the technical experts have to make a decision about the level of technology which gets installed (cheaper and more reliable, but quicker to become obsolete; or newer, more expensive and with a longer shelf-life), the FD must decide which procurement route offers the most protection against redundancy, which suppliers offer the best value for money and how best to ensure that technology is not costing the company over the odds. The IT industry’s relative immaturity also means its own sophistication in terms of sales channels is developing startlingly quickly. Dell is a good example of this. The company was founded in 1984 with a mission to sell PCs direct to the end-user. That sales model worked well for a long time, but as soon as the company grew up (for the year to May, Dell’s revenues were just short of $14bn), it realised that corporations simply don’t buy IT infrastructure over the telephone. So now, having spent so long evangelising about the cost-effectiveness of direct buying, it has a corporate sales force, channel partners for large installations, and a hugely successful website, where business techies can specify exactly what kind of PC they want to buy. Likewise Compaq, the grand-daddy of PC vendors – and now, after the acquisition of Digital, one of the top three corporate IT companies in the world – is trying to ensure it can offer whichever sales model will best suit business buyers. But, with computer systems still a complicated purchase, Compaq still believes in the tried and tested channel reseller route. Getting that message across in the face of the growth of direct vendors such as Dell and Gateway has been its biggest problem. “Dell do a very good job of marketing and selling their products,” admits Ian Jackson, director of channel sales at Compaq UK. “What we perhaps haven’t done is a very good job of marketing why people should buy through resellers. We passionately believe that they do add value to the customer, and we maybe haven’t done such a good job of explaining what that value is.” The point Jackson is keen to get across is that even if you buy from a direct vendor, the actual process of getting equipment from the factory to the desk is the same. “Dell, for example, might use TNT to courier the things and a company such as Unisys to do some of the systems integration for them. It will use MCS to maintain and do service and support for the machines. So this idea of partnerships isn’t unique to us, and the direct vendors tend to use partners as well,” he says. Certainly, Dell’s relatively new corporate sales effort is based on traditional models of account handling that will be more familiar to FDs and procurement departments than their own call-centre method. But Jackson concedes that its important for the manufacturer to be close at hand, even if orders are fulfilled through a channel partner. “That’s why we’ve opened a call centre which isn’t there to sell directly, but it’s to make sure they know Compaq is interested in their business,” he says. Although even Compaq admits that PCs are fast becoming a standardised item, and the actual differences in the various buying processes are minimal (even direct vendors use partners, albeit not so closely tied in to the manufacturer), there are other differentiators. Jackson stresses, “even if it’s a commodity buy, they still want something that isn’t going to break down.” So a second aspect comes in: brand. Of course, reliability is a crucial factor in corporate IT systems, and any purchasing decision has to be made with quality in mind. But if PCs (and, it must be stressed, high-end systems, networks and enterprise-level boxes are a different kettle of fish) have become standardised and commoditised, why bother? That, to an extent, is the view of Matthew Eatough of purchasing consultancy The Cost Reduction Partnership. “Do you need XYZ brand as opposed to any other brand?” he asks. “No one ever got sacked for buying an IBM, and you can probably say the same about Dell or Compaq, but does anybody do a cost-benefit analysis of the difference between buying them and a box-shifting brand? It may be that the reliability isn’t as good, but if you’ve got a population of 40 machines and one goes down, how big a deal is that anyway?” When Financial Director interviewed Richard Clapson of budget airline Debonair, in March, he was already on the non-brand bandwagon. “We discovered Tiny Computers … make a perfectly good PC product,” he said. “It just doesn’t have the brand name. And their products were half the price or less compared with the competition.” Many companies will feel that they need the reputedly higher reliability of the big brands, but Eatough isn’t so sure that that makes any sense. “There are surveys which show that if PCs haven’t gone down in the first week after delivery, the statistical probability of them going down is remote,” he explains. “The only things to fail are software and moving parts.” Since the software has to be fixed by the software company, and the moving parts can really only be damaged in transit or by user-related damage, it’s unlikely that you’ll need the reassurance of the famous badge, he argues. In fact, Eatough sees maintenance as a crucial area where companies can save money when purchasing IT. Quite apart from the fact that most failures will show up pretty quickly after delivery, companies often throw money away on needless maintenance contracts. “There’s a lot of double cover on maintenance,” he explains. “You’ll often find that people have got an umbrella maintenance agreement, plus the manufacturer’s one-year on-site warranty, plus they’ve probably got the in-house expertise to solve the problems anyway.” “It’s very often the case that maintenance arrangements should be audited and analysed carefully in relation to call-outs,” Eatough continues. “Have a look at your call-out history and compare it to costs. You might start to think about doing it in a less traditional way. In truth, PCs don’t actually break down a lot other than from operator error or damage. Now your maintenance contract probably doesn’t cover that. So they’ll come out (within the time agreed in the contract), but you’ll get a bill. What was the point of paying the premium for the maintenance contract when all you really needed perhaps was a service level agreement with someone which could be much cheaper than guaranteeing a call-out time.” The Cost Reduction Partnership’s philosophy is simple. “These things are churned out literally in their hundreds of thousands in the Far East,” says Eatough. “It’s just a widget, and … these things are consumables. Our philosophy is stripping away a lot of the mystique and saying: ‘This is purchasing like anything else. Accept that and look at it in a different way.'” So even the basic procurement process, if analysed like any other, can yield savings. “Understand the specific spec of the machine you want,” he says. “Then question the spec. For example, if you’ve got a networked system, do you really need to have every PC on the system with a CD-ROM drive?” Since a standard CD-ROM can only be used to read in data or applications, many companies could make do with one on the network and make a sizeable saving. Another purchasing pitfall in IT is software. Eatough warns buyers to check exactly what licencing deals are already in place in their company, particularly when they buy new versions of existing packages or software bundled with new PCs, to make sure they haven’t paid twice for using the same piece of software. Microsoft, which dominates desktop software, offers an Enterprise Licence, which allows companies to buy a portfolio of products under one agreement. “It allows people to standardise on a product set, and in doing that they are able to reduce their cost of ownership over the course of the licence,” says Paul Heath, sales manager for Microsoft’s enterprise customer unit. This kind of deal also makes upgrading easier, since the licencing for a new version of software you already have will be built-in to the enterprise-wide contract. Corel, whose WordPerfect Suite goes head-to-head with Microsoft Office, has an even more cost-effective approach: server licences. This way, if new machines are added to the corporate roster, you don’t have to worry about keeping track of numbers because you’ll only need a new licence if the total breaches the upper limit of the agreement. Both these approaches help the customer by centralising procurement and help the vendor by ensuring companies pay enough licence money to keep them legally covered. But Heath acknowledges that whereas much of a company’s purchasing will be straightforward, there are special problems with IT. The decison is made by “both the professional procurement people and the IT people who drive the strategy,” he points out, “so it’s more than just a purchasing-led project. You might argue that if someone’s buying a PC, it’s a standard spec, and you just go out and buy it.” Higher end systems and software require more consultation. Heath is hopeful that even some of the more technical products will end up being purchased in this way. “We would argue that what we’re doing both on the desktop and on the server is commoditising , certainly the pricing of, what are complex products, and putting a scheme in place that allows people to buy very simply, even at the largest scale,” he says. Simplifying the procurement process is just another way of driving down the cost of ownership. And while it’s important to remember that there are special factors affecting IT buying, if, once the technical details have been hammered out, it’s treated like any other purchase, many companies might find it can get much cheaper and easier to do. DO I BUY OR DO I LEASE? Outright purchase remains a very popular method of acquiring IT kit, and although some computers tend to become obsolete faster than the time it takes to depreciate them, rental still makes little sense outside of short-term or highly specific requirements. But leasing is becoming more common, and the cash a company such as Compaq has at its disposal is ideal for setting up financing schemes. While this might have traditionally been available from resellers in the channel, Compaq seems keen to cement its direct relationship with the customer by providing financing, and at the same time continuing to fulfil orders though its dealers. But Matthew Eatough of The Cost Reduction Partnership is cautious. “There is absolutely nothing wrong with leasing,” he counsels, “but the average purchaser should consider: is a computer manufacturer or reseller the optimum source of financing for them? If you want to buy a computer, talk to a computer manufacturer; if you want to borrow money, talk to a bank first. If you’re purchasing from the man who is also lending you the money, at best it lacks transparency.” So why are computer companies offering leasing deals? “Leasing probably provides fatter margins than box-shifting,” reckons Eatough. But there are other reasons. “The equipment has a built-in obsolescence so. when you buy IT that in two years time is all going to be obsolete, you’re going to want something different. If you do it on the back of a three-year funding arrangement – fine, it’s a way of upgrading, but it’s also a way the supplier locks you in to them forever. In fact, there’s nothing wrong with it, but anybody who goes into it really ought to go into it with their eyes open.” There is another reason for thinking twice about leasing deals on offer from manufacturers. “When it comes to buying something, there’s nothing better than being a cash purchaser,” explains Eatough. “You can push the deals much harder.”

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