Savvy vendor management can significantly reduce expenses by planning and optimizing IT purchases of products and services. By applying several best practices, business owners can improve dealings with vendors during critical moments in the management cycle.
An August Info-Tech Impact Research report found that proactive, ongoing vendor management is a successful cost-reduction strategy. Many IT departments reported cost savings through activities such as vendor renegotiation, replacement, and consolidation.
Moreover, Info-Tech's research found that the top vendor candidates for major cost reduction provide telecommunications, applications, maintenance and support, hardware, and printers to the organization. Here we explain how business owners can apply vendor management practices for dealing with major vendors during critical moments in the management cycle.
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Be Thorough With Major Vendors
Not every vendor is worth intricately managing. The cost savings available through wringing discounts out of small contracts, or switching minor vendors, are quite possibly more trouble than they're worth. However, when it comes to major vendors (which the organization may consider business partners), careful management can provide ample savings.
Info-Tech determined that organizations often discovered major cost-reduction opportunities in product/service arrangements with telecom, application, support, hardware, and printer vendors. Unsurprisingly, these vendors often lay the second-greatest claim to IT's operating budget, after staffing. Concentrate vendor management efforts, and the accompanying cycles, on the vendors that take up the bulk of this spending. Breaking the budget down by vendor spend will quickly identify which vendors are ripe for taking cost out.
Treat Major Vendors As Business Partners
Vendors that claim a major portion of the operating budget likely provide many mission-critical products and services to the organization. For this reason, they should be treated with respect during discussion and negotiation. Centralized vendor management needs to approach product, service, and pricing changes with the mind-set that the vendor and organization are working together as business partners.
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Recommendations
- Understand the organization's position as an existing client. The vendor knows it's less costly to maintain an account than to find a new one. Establishing a long-term relationship is in the interest of the vendor. In return for loyalty, the organization should expect preferred pricing and prompt resolution of performance issues that may arise. When negotiating, draw attention to both the relationship and previous performance issues; ask for fair compensation. This could mean a 10% price discount or quid pro quo services, such as upgraded service levels or reduced rates for installation or maintenance.
- Communicate the organization's growth prospects. Vendors have an inkling of who will grow, partly through the professionalism and preparedness of the stakeholders they deal with. However, the organization can further influence this by educating the vendor on a presentation of progress and growth strategy. Ensure that the company's prospects (and potential for new vendor needs) are communicated before renegotiations.
- Explore and consolidate. Many vendors provide a suite of services rather than a single product, but is IT taking advantage of this? Significant discounts are possible if IT and the vendor can agree to a bundle of contracts or services. For example, a telecom provider might provide a major discount in two areas if it takes over IP telephony services while the mobility contract is renegotiated. Explore these options, but perform adequate due diligence on the new or consolidated service to ensure that the vendor is a good fit beyond just price. An existing relationship with a vendor in one area does not mean IT gets the best option in another area.
- Don't cause undue pain for the vendor. Many arrangements for products and services will last three to five years or more. If the vendor is pressured to take too much out of the price, performance could suffer throughout the relationship. Instead, work to come up with creative solutions that provide fair value for both parties. For example, a PC hardware vendor may provide significant purchase discounts and preferred maintenance contracts if the organization agrees to negotiate both at the same time. IT reduces the cost of buying and maintaining major assets, while the PC vendor gets a solid and reliable long-term client.
Bottom Line
Centralized vendor management can significantly reduce expenses by planning and optimizing IT's purchases of products and services. Moreover, certain vendors are prime cost-reduction candidates.
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Aaron Hay is a research consultant with Info-Tech Research Group. He has expertise in knowledge and research management, telecommunications, customer-relationship development, marketing, and sales.
