January 2012

Technology Purchasing Negotiations

Top 10 Considerations to Negotiate when Purchasing Technology

By Todd Bone, XSnet.com

A global economy has created a more complex acquisition environment for today’s buyers. A global economy means vendors (distributors, wholesale direct, retailers, authorized and independent resellers) all have access to global supply meaning better prices, but this also means there are more vendors to vet as potential suppliers.

In addition, as original equipment manufacturers (OEMs) attempt to control distribution, prices and therefore profits, buyers have more OEM FUD (Fear, Uncertainty and Doubt) to swim through.

Buying Technology products and services also has some nuances to consider since technology usually includes both hardware and software.

The following includes the Top 10 things both Commercial and Federal buyers should consider:

1. Vendor Screening – Statistics show 8 out of 10 businesses fail in the first 3 years, and only 4 percent of businesses reach $5 million in annual revenue. Therefore it is prudent to choose vendors that have been in businesses for at least 3 years and have at least $5 million in annual revenue. Additional screening methods include performance history, references, vendors on Federal contract schedules including GSA, and vendors that belong to reputable associations. If a vendor doesn’t prove its stability, use this as a negotiation tool for payment terms that safeguard against failure to perform.

2. Create an atmosphere of full and open competition – this is a way to achieve significant savings. The commercial sector uses competition much more effectively than Federal buyers. While they have more restrictions in the RFQ process, Federal buyers should follow recommendations by the GAO (General Accountability Office) to increase competition. In this report the GAO stated to the Committee on Oversight and Government Reform, “The government obligates tens of billions of dollars every year under noncompetitive contracts. Further, the government obligates billions of dollars annually under contracts that are awarded competitively but for which the government receives only one offer”.

3.Stop letting the Manufacturer unduly influence you! – Limiting the purchase to one Brand then to only their Resellers and in a certain Location limits competition. The lack of competition means you are going to pay more since you have let the Manufacturer control the RFQ requirements, negotiation process and prices. This goes back to #2 – creating open competition. An estimated 50% of all I.T. purchases are made from Independent Resellers.

4. Consider New-in-box equipment or Refurbished equipment vs. Channel New – For goodness sakes, there is nothing wrong with purchasing refurbished computer and networking equipment. Every manufacturer tells you not to buy this for all types of reasons (We call this F.U.D. – Fear, Uncertainty and Doubt). At the same time, every manufacturer resells refurbished equipment. Not only do they resell their own equipment but they also resell other manufacturers equipment because they accept trade-in equipment and have equipment constantly coming off lease. New-in-box equipment is sold in every market in the world and is perfectly legal. Savvy Wholesalers and Retailer source equipment overseas using “arbitrage”. Arbitrage is taking advantage of discounts and exchange rates to buy this equipment at a better discount. Manufacturers call this grey-market, but the U.S. Supreme Court ruled under the First Sale Doctrine that it is “legal” for suppliers to buy this equipment and resell it to anyone they want since they have clear title. End-users buy used or refurbished Antiques, Furniture, Art Work, Jewelry, Autos, Boats, Jeans, iPhones and Houses every day. So why be convinced that computers are any different? Worst case scenario, if the manufacturer knows you can buy this equipment refurbished for 40% less, they will sharpen their pencils to win the award.

5. Buy Alternative or 3rd Party Maintenance – Most manufacturers outsource Tier 1 call support overseas and subcontract their Resellers and 3rd Party Maintenance Providers to perform onsite support. This is well known in the industry and documented on many Manufacturers’ fine print in their literature. The only leverage that some have like Oracle is the run around about how to get software updates and patches for Operating Systems. In antitrust court settlements and legal letters responding to State Attorney Generals, even Oracle/Sun and Cisco (SMARTnet®) have acknowledged that customers do not need to buy a support contract from the OEM to get patches and updates. We highly recommend after the 1st year that the equipment is in the field to put the support out for competitive bid and not restrict any reputable maintenance organization from bidding on it, since chances are they may be subcontracted by the Manufacturer anyway.

6. Extend the life of your equipment – When Manufacturers declare equipment End-of-Life and/or End-of-Support they typically provide operating system support up to 5 years longer. It’s expensive to replace equipment in good working order simply because the Manufacturer ends support. These expenses come in the form of purchasing, installing, trouble shooting, re-configuration and de-installing the old equipment. In addition there is the cost of training staff to use the new equipment. The Space Shuttle still runs on a 25 year old computer, so get as much out of your hardware as possible in order to prolong unnecessary spending. Most 3rd party maintenance providers support OEM equipment for as long as you use it.

7. Coterminous ads and deletes – Negotiate the ability to add and delete products from your maintenance contracts in a coterminous and prorated manner. This will reduce wasted spending to service equipment that is no longer used. The ability to add equipment to an existing contract with the same end-date will dramatically decrease purchasing and contract management.

8. Ownership and License Transfer – Buyers must protect the value of their purchases by making sure that they can sell, trade in, or lease equipment in the secondary market. The IACCM (International Association for Contract & Commercial Management) states it best, “This sounds insulting obvious, but it isn’t. The key is the ability to transfer any special purpose software with the hardware. Products without the ability to transfer special purpose licenses required to operate the hardware are lumps of debris which need to be written off within the initial warranty period. Contractual protection, in the form of a guaranteed right to transfer licenses, is essential to protecting value.

9. Purchase at the end of a quarter – Most organizations like to end the quarter with strong sales and will almost always give additional discounts at the end of the quarter. But, be prepared to issue the PO by quarter-end as these offers are not honored past the last day of the quarter.

10. Federal buyers can help lower the National Debt – As U.S. Manufacturers outsource more and more overseas, hire more employees overseas and keep their cash overseas to avoid paying taxes, Federal buyers exasperate the deficit by allowing these same manufacturers to dictate competition and not getting the best prices from these manufacturers who often sell the same products in overseas markets for 30 to 50 percent less than what Federal buyers can procure for. Something is significantly wrong here. Federal buyers should lobby their Agencies to change policies, regulations and practices to create more competition and use this debt problem in negotiations. The debt is a huge negotiation tool, yet Federal buyers are not using it. Something has to change and quickly.

We hope these negotiation topics will create more savings for all entities especially Federal Agencies. The U.S. Economy benefits when purchases are made from Small Businesses since according to the SBA, Small Businesses have generated 64 percent of net new jobs over the past 15 years. Many of our family and neighbors who are out of work need Small Business to survive and grow. So please, do everything you can in your position to support U.S. Small Businesses.

XS International specializes in: OEM and Alternative I.T. Maintenance, Datacenter Services, IT Asset Disposition (ITAD), IT Software Solutions for reducing costs and maximizing utilization and efficiency, New Datacenter and High Performance Computers, Networking & Storage, Refurbished Datacenter and High Performance Computers, Networking & Storage. They can be reached at www.xsnet.com or NAsales@xsnet.com.