- 01 December, 1999 12:25
A year ago Ian Taylor finally decided he was sick to death of PC servicemen who seemed to live on his company's premises, and machines that performed well below par. He resolved to make some changes. Taylor had tried sourcing PCs from a range of different suppliers over the years, and he had battle scars to show for it. To take his company out of the war zone and into safer territory, the information services manager for book distributor Gordon & Gotch determined to source his corporate PCs from just two suppliers: IBM and Dell.
These days Taylor keeps both suppliers on their toes by making sure they know there's a competitor out there, ever poised to steal good business from under their noses; and he reaps the benefits of the lower cost of ownership that comes with higher levels of standardisation on the desktop. He says both IBM and Dell would clearly like to get a bigger share of the business -- and that suits him just fine. By making sure both vendors know there's a keen competitor vying directly for sales, he helps keep both of them focused on remaining competitive and ensures the best possible deal for his organisation.
Ian Gibbs, IS manager with HPM Industries, sees things slightly differently and relies on a fair degree of animal cunning to keep his PC provider competitive. Gibbs has been committed to buying PCs from a single source for the last four years, in the interest of standardising the mix of hardware in the organisation. Halfway through that four-year period the company switched from Compaq to Dell, because of concerns over pricing and service from a vendor that may have become complacent about having the company's business.
But in order to keep Dell from becoming complacent in its turn, Gibbs recently went back and ordered some Compaq machines to fill an order for interstate branches. This suited HPM, because most of its interstate machines were Compaq devices anyway, meaning Compaq PCs would better fit the environment. It also proved an excellent way to keep Dell's pricing competitive. "It was a particularly good deal. Dell quoted on that transaction and, when they inquired what was happening with that order, we told them we'd bought from someone else, which is always a good trigger," he says.
Gibbs and Taylor are like many CIOs in valuing simplicity and stability when it comes to PC assets. They know having a proliferation of different versions of operating systems, drivers, graphics chips, applications, peripherals and the like scattered throughout the organisation drives up the cost of ownership and leads to endless headaches and complications. For large organisations the answer would seem to be obvious: single sourcing of PCs to promote upfront cost savings and simplicity, while substantially reducing total cost of ownership (TCO). But things are rarely so simple.
Bruce McCabe, Australian research director with GartnerGroup, says there's no doubt reducing the number of PC suppliers in the organisation can substantially reduce costs through standardisation. "The closer you can get to one software image and one hardware profile, the easier it is to deploy it, to manage it, to upgrade it, and to solve user problems. It reflects everywhere in the organisation's costs," McCabe says "Now that's the same with everything; wherever you can standardise, and that includes using one supplier, there are cost benefits associated with that from a management point of view. So, as a general rule, we say to our clients you must look for ways to simplify what you have, and get a lowest common denominator, if you like, a commonality across all your platforms."
But single sourcing also has its perils, and there are even smarter ways of skinning the TCO cat. According to McCabe, any large organisation that goes to a single desktop supplier -- at least for large deployments of 500 units or more -- has gone too far. GartnerGroup advises its big clients to build relationships with dual suppliers to keep both competitive, or at the very least to have a prequalified second vendor on standby. "They should also let both vendors know that they are constantly in a competitive situation. So if the pricing becomes uncompetitive, or if they are unsatisfied with service levels, then they are in a position to change suppliers for their next batch or their next upgrade immediately, without going to tender again -- they've got two suppliers, and that tends to work pretty well," McCabe says.
Yet dual sourcing doesn't suit every organisation. Gary Smith, IT manager with TNT Australia, sees little value for his organisation in dual sourcing. Smith says TNT has global standards to which every division tries to adhere whenever possible. And while he says GartnerGroup's recommendation sounds reasonable, in practice, when you're in the game of running a business, one of the most cost-effective ways to run a significant desktop population is to have standards and have a single standard operating environment. "If you're having to maintain that across multiple platforms -- because a Hewlett-Packard PC and an IBM PC are different -- you've got to have two standard operating environments, all of a sudden everything is getting more complicated."
Smith won't say whether he has ever had to make good the implied threat that if HP doesn't stay up to scratch he'll take the business elsewhere. It would be too commercially sensitive for him to divulge such information, he says. He does insist incumbent suppliers normally respond to external pressure.
Show No Mercy
CIOs have recognised for years the savings to be had through standardisation. Taylor says there's no doubt Gordon & Gotch has achieved substantial savings since it standardised, despite the move to more expensive name brands. "There was a time when the name brands had a heavy additional cost impost on the initial purchase. From our perspective that cost differential has not disappeared, but it is now almost inconsequential in the whole scheme of things."
But standardisation should never be the be-all and end-all of PC sourcing arrangements. It's because his company has a single standard for PCs that TNT's Smith sticks with incumbent supplier Hewlett-Packard. That's not to say HP can afford to rest on its laurels as far as TNT's business goes. With a desktop population of around 2000 PCs to look after, Smith says he keeps HP competitive by "being merciless". He remains very much aware of what is happening in the market and subjects HP to regular reviews of service, quality and price. Where necessary, he exposes that review process to possible other contenders.
At Adelaide-based Southcorp, IT manager Peter Rogers maintains a single relationship with a reseller and a single hardware supplier that supplies to that reseller. To keep their prices competitive, Southcorp has an arrangement with the reseller that involves a fixed margin. That provides plenty of incentive for the reseller -- keen to maintain the competitive arrangement -- to watch HP carefully on Southcorp's behalf.
"We've also negotiated a term contract with the vendor on hardware, and that contract was again based on a percentage off their price," Rogers says "What typically happens is that they will set a benchmark price; we negotiate a percentage off that benchmark price, which we believe is quite competitive; and when we've tested the market from time to time informally, that's been validated." Rogers -- who buys around 1000 PCs and 500 laptops a year -- believes the strategy has proved highly effective.
In the US, it seems most IT departments are single-sourcing their PCs these days. A recent survey of 300 US companies of varying sizes, conducted by research company IDC, found almost 62 per cent of companies with more than 500 employees sourced most PC hardware through one primary manufacturer. But like McCabe, Peter Hall, senior analyst with Australian company International Research Bureau, points to the high degree of risk associated with a single-sourcing approach. He says that every tender he has been involved in has proved the importance of not tying the organisation to a single supplier.
"On the last large consulting jobs we were doing, where we were buying 8000-odd machines and servers as well, we were finding that without input from multiple suppliers the client was not necessarily always getting the best solution. He was just getting what was available," Hall says. "The debate of always trying to fit the product to the client, rather than just supplying what the client asked for, didn't happen. I think it's quite critical that that cycle happens; but it's also, I've found, very critical that large clients work closely with suppliers so they get the selling cycle of technology going."
On the other hand, as Gordon & Gotch's Taylor points out, treating with too many vendors carries its own risk: that vendors will see you as disloyal and not worth investing resources in. While Gordon & Gotch would never remain devoted to a supplier for the sake of loyalty, Taylor says he does recognise that if the company jumps from supplier to supplier too frequently, those suppliers themselves will start to become wary of the sort of relationship they can build with the company.
In the old days, when the adage "no one ever got fired for buying IBM" still had currency, it was IBM's financial health as well as the strength of its technology that gave buyers such confidence. Diligent CIOs will make sure they are fully aware of the financial health of any proposed IT partner(s) before entering into any deals, to reduce the risk of being seriously caught out.
Price is another pitfall of any single-sourcing agreement, and that is where dual sourcing can prove the superior strategy. Vendors who offer bargain-basement prices to secure the company's business might not remain so accommodating once they think that business is in the bag. Gartner's McCabe says a common complaint from companies which single-source is that while the pricing is good on day one, halfway through the contract, when they take another look, they realise the pricing is no longer competitive.
"It's not that vendors are ripping them off," he says. "Vendors focus their attention on new business. If they feel there's a risk of losing the account; or if you're a business that they're trying to win, which they've not had before, they're very focused. They put in lots of resources, lots of customer service, things work well. When they feel you are locked in, their attention and their resources are focused on the new opportunities elsewhere. This is just human nature."
With the price of PCs dropping between 7 per cent and 12 per cent every three months, Hall advises clients to regularly review their buying price -- and to avoid contracts that lock them in. "I've got clients that are buying on contracts that are dearer than the list price now, but when they signed up, they got a good deal. If they don't become aware of the cycle, they don't see what's going on," he says.
One way to guard against that tendency is to keep a close watch on prices, perhaps via an independent price index. You can also use consultants to help ensure the prices you pay are indexed to market averages.
Build an escape clause into any contract with the vendor to ensure you can walk away from the agreement at any time without being sued -- even if it means stipulating you'll pay a fee if you cancel. That way, should pricing become a problem you can pay a penalty, walk away and buy elsewhere.
Another risk of sticking with a single qualified platform is the danger of there being a supply shortage right when you need an order in a hurry, or technical problems with a batch of computers. At North Limited, CIO Michael Redmond minimises this risk by forecasting demand as accurately as possible so that his vendor can keep units in stock until the company is ready to draw on them. "That means we get similar network cards, similar standard operating system, desktop, all of those are similar. So it's like a cookie cutter; you just get one, then all the rest are the same," Redmond says. "We're standardising on our servers as well; the same standard model and standard configuration, so we know if our software works on one it will work on all."
Just Tell Me What You Want
According to Hall, smart buyers use centralised national purchasing to consolidate the buying power of their company. They also recognise the importance of making vendors go through the complete selling cycle in reducing TCO. He says he sees too many situations where dealers simply ask clients what they want, rather than selling them on the benefits of particular technologies and manufacturers. He warns that IT departments that let them get away with it are limited in their ability to learn or adapt.
"That's very important in file server technology. It's very important when you're doing fleet management of PCs; because with large scales, you've got to find every way to reduce the running costs," Hall says. "You have to ensure you're getting a clear selling cycle of technology [adaptation], otherwise you're just hearing one view of the world. And that can be, in fact, you telling your dealer, and to keep you happy, he repeating back what you told him. You'll self-fulfil yourself."
Always look for a return on any investment before deploying technology, and recognise there are sometimes reasons for not deploying them. Hall, who says he has clients who have put in so many printers they can't walk across the office floor, claims he sometimes shocks clients by pointing out reasons why they should take some technologies out. Many clients are grappling with the challenge of managing the constant cycle of replacing product, he says.
To help clients get a clearer picture of the true cost of keeping technologies in, his company is writing specialist auditing software which will let companies create a 3D, floor-by-floor picture of their company structure. They can then key in all their hardware and get the software to calculate their running costs and help them with what if' scenarios, testing floor by floor.
"My view is there must be a return on investment. If you buy this technology, you have to either save money or improve productivity; but if you simply keep replacing technology, you're going to burn a hole somewhere and one day someone is going to say: Stop, you can't have any more'," Hall says. "Some of these large companies in Australia are just doing that. I went to a meeting today where a client said: We're buying off 4000 different companies.' We worked out they could maybe get it down to 500. So there is a lot of rationalisation [to be done] in procurement as well," he says.