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Management Update: Adopt the Right Process for PC Procurements
24 September 2003
Frances O'Brien

Document Type:  InSide Gartner
Note Number:  IGG-09242003-02
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A comprehensive PC life cycle procurement program encompasses the strategic management of hardware, from planning through acquisition, maintenance and disposal. To achieve procurement goals, enterprises must adopt procurement models that define what constitutes value, and then focus on the value received, not just price.


A comprehensive PC life cycle procurement program encompasses the strategic management of hardware, from planning through acquisition, maintenance and disposal. To achieve procurement goals, enterprises must adopt procurement models that define what constitutes value, and then focus on the value received, not just price.

Principal Procurement Goal: Value Received

The PC market has consolidated to a handful of players; sales tactics have become more cutthroat, information has become more misleading and alternatives have narrowed. Gartner remains steadfast in its conviction — backed up by extensive research with its clients — that value received, not lowest purchase price, remains the principal goal for enterprise procurement officers.

In many enterprises, PC procurement inhibits cost reduction. When looking at a PC’s total cost of ownership (TCO), only a fraction is directly related to hardware capital costs. Therefore, seeking the lowest price for the hardware is not the best basis for selecting a supplier. Failing to identify all costs throughout the procurement process and equipment life cycle will not make them go away.

The industry is in a period of replacement, so most enterprises are not deploying additional PCs, but are replacing them. Therefore, as each new PC comes in, one is retired. That means enterprises must ensure that the procurement process focuses on more than the initial purchase price — it must also focus on factors such as deployment; data and personality transfer; hard-drive cleansing; and disposal of the displaced PC. To compare prices, enterprises must ensure a true “apples to apples” comparison of technology and services is being made, that the classes of machines are comparable, and the terms and conditions are consistent.

A comprehensive PC life cycle procurement program encompasses the strategic management of hardware, from planning through acquisition, maintenance and disposal. Such a program will enable the enterprise to deploy the right assets, at the right time, with the right software license and warranty entitlements, at the right cost, and with the right service levels.

To achieve those goals, enterprises must adopt procurement models that define what constitutes value, and then focus on the value received, not just price. In addition, they should put processes in place to forecast product and application requirements, calculate costs of operations and deployment, and create a life cycle management plan that will provide the enterprise with the capability to leverage established investments.

Team-Based Procurement Negotiations

Strategic Planning Assumption: Enterprises that systematically manage the life cycle of their IT assets will reduce the cost per asset by as much as 30 percent during the first year, and between 5 percent and 10 percent annually during the next five years (0.8 probability).

Tactical Guideline: IT procurement will increasingly be seen as a key player in managing escalating costs and assuring that products and services support the overall business strategy.

IT procurement addresses business needs or problems. The better a need or problem is understood, the more likely the purchase will be sound. Hence, it’s essential that all affected parties get together to decide on what works best.

Multiparty negotiations can be chaotic unless structure is imposed. Employees are compensated differently and have different stakes in the purchase. Team-based negotiations will play an important role in evaluating PC deals. Such deals are doomed to fail if consensus cannot be reached upfront as to what the issues are, and all parties are not negotiating from the same page.

Cross-functional teams, whose membership includes IS, legal, purchasing, finance and end-user representation, have demonstrated the most success. Once established, these teams must be sufficiently empowered and supported by executive management to fulfill their charters. Teams that have discussed and agreed to the program goals and various business unit requirements are more effective at communicating with and selecting vendors. Enterprises must develop structured processes and timetables (usually two to nine months) for the vendor negotiation process.

The team should also understand its own weaknesses and be prepared to address them through the negotiation process. For example, is the enterprise consistently unable to forecast requirements, or is it slow to complete contracts? Willingness to acknowledge and work with vendors to minimize the effects of the enterprise’s shortcomings can be as productive a tactic as leveraging the enterprise’s strengths.

Define Hardware Requirements

Tactical Guideline: To reduce desktop ownership costs, enterprises should deploy configurations that include only technologies required by users to perform their job functions — nothing more and nothing less.

Hardware continues to significantly outpace most mainstream application requirements, and Gartner expects it will continue to do so for at least the next three years, presenting enterprises with the opportunity to ride down price curves. Reducing desktop TCO may be as easy and inexpensive as modifying current standards to include manageable configurations and necessary technologies.

In a perfect world, a PC would be put in place and “never touched again” until it was retired from service. Unfortunately, the world is not perfect, so frequently a PC must be touched during its life cycle. But the number of touches can often be managed by deploying the appropriate configuration in the first place.

Many enterprises adopt a “one size fits all” approach that results in buying machines with hardware specifications well beyond requirements, thereby wasting technology resources — or in buying machines equipped with inadequate specifications, necessitating early upgrades.

To provide an example, Gartner has priced out three configurations (see Figure 3). By selecting Configuration 2 instead of Configuration 1, an enterprise can save more than 20 percent. However, since one size does not fit all, Gartner has compared a more likely scenario whereby the enterprise purchases 10 percent each of configurations 1 and 3 and 80 percent of configuration 2. The savings are still significant.

Figure 3

PC Configuration Example — Buy Only What You Need

Figure 1

Enterprises should focus PC acquisitions on hardware that includes only the technologies required by users to perform their jobs, and to center hardware acquisitions around “highly managed” product offerings. Doing so will result in immediate cost savings and provide a manageable infrastructure for future initiatives.

PC Pricing: No Single Correct Answer

Tactical Guideline: Pricing PCs is difficult. Significant differences between supplier price quotes may reflect either greater cost efficiencies or the supplier’s lack of understanding of the enterprise’s requirements.

Price negotiation for PC equipment is difficult at best. Part of the reason lies in the variability of configurations and components offered. Another issue is the lack of data or variations in the data. No magic pricing formula or universal price guide exists to set equipment pricing. Additionally, each supplier may have a different cost structure, making comparisons even more difficult.

The most popular model is the “Web minus” model (see Figure 4). But just because it is the most popular doesn’t mean it is the best. What is most important when selecting a pricing strategy is to understand how and when the enterprise buys PCs. It’s also important to understand how price and product changes will be communicated over time. Don’t get sucked in by the “one time, win the business” quote.

Figure 4

PC Pricing — Weigh Advantages and Disadvantages

Figure 2

Many enterprises spend a significant amount of time negotiating for the price of the hardware and then never verify that they indeed received the price that they negotiated. Too often, after a deal has been negotiated, the supplier’s salesperson will return to his or her office and, through oversight or intent, will input the supplier’s “standard” offering. If that isn’t caught early, the enterprise could be overpaying for products and services from the very beginning of the deal.

Evaluate Pricing Options

Inherent in every pricing structure is the concept of risk. Who bears the risk, and who pays for it? Is the risk shared along with rewards?

In 2001, many enterprises locked into discounts off the Web price in the range of 20 percent to 25 percent, which was excellent at that time. However, due to current market conditions, enterprises are being offered 40 percent to 50 percent discounts off the list price. So, was 20 percent to 25 percent a good deal? At the time yes. Today, no. Conversely, is a 40 percent to 50 percent discount off of today’s list price sustainable? No. The question then becomes, how much risk do you want to tolerate? Do you want certainty or price protection?

When analyzing price methodologies, they must be viewed in the context of value. Enterprise value perceptions are not constant, but are influenced by events or situations in the business environment (see Figure 5). Is the price enterprises are being asked to pay equal to the quality and service they expect to receive? Lower prices may justify a lack of service under the right circumstances. Alter the circumstances, and the value may change. Enterprises should also develop “what if” scenarios to financially quantify the cost impact if rollout schedules slip or if forecast quantities are incorrect.

Figure 5

Determine the Best Pricing Method for the Enterprise

Figure 3

Action Item: Evaluate pricing options against equipment forecasts, budget, rollout schedules and the amount of administration required.

The Importance of Thorough Deal Analysis

Strategic Planning Assumption: Through 2005, at least 50 percent of large enterprises that fail to evaluate the entire cost of PC deals will overspend by at least 10 percent on PC purchases (0.7 probability).

In another example (see Figure 6), an enterprise received bids from two vendors, and the prices were substantially different. Without a thorough review of the deal, the finance department would likely select the vendor with the lowest bid price.

Figure 6

Case Study — PC Pricing Proposals From Two Vendors

Figure 4

The enterprise, however, was determined to perform thorough deal analysis, including a detailed review of contracting issues and service-level commitments. After several negotiating sessions with the vendors, the client discovered that the low bid was not as good as it seemed after adding in all the other charges the enterprise would likely incur.

Differences in the pricing of individual bid components may also highlight areas in which certain vendors are more efficient, or a vendor’s lack of understanding of the enterprise’s requirements. Therefore, it is extremely important to ensure that vendors fully understand the importance of the support requirements.

While good deal analysis can help make the best choice, it does not always guarantee a good outcome. Because of uncertainty, ambiguity and complexity, actual outcomes are not always what was intended or represented financially. Therefore, it is important to be clear about all assumptions made when reviewing deals.

Supplier Management

If you’re not managing your supplier, your supplier is managing you. But many enterprises mistakenly believe that supplier management doesn’t start until after the contract is signed. In reality, it begins at the very first communication with the vendor.

Effective supplier management strategies begin when the enterprise sets the agenda, the rules of engagement, the timelines and, most importantly, the chain of communication. It is a process that includes contract management, established methods and procedures, supplier feedback, resource tracking and effective service-level agreements (SLAs).

The relationship between an enterprise and a supplier must be a type of partnership. The objective of IT procurement is to satisfy business requirements at the lowest cost commensurate with the risk associated with the project and the value received. In an area like IT procurement, few established guidelines exist to manage this.

The critical success factor is the discipline to manage the process and keep communications open with the suppliers involved. Enterprises take a significant risk by not putting a manager in place to oversee the success of the relationship. The key to getting supplier management established as a core IT competency is to link it to specific tactical deliverables. Not managing strategic suppliers can be costly in terms of unused or mismanaged resources, and lost productivity when performance goes awry or when requirements change.

Negotiating IT Contracts

Tactical Guidelines: Enterprises that maximize their supplier relationships do more than simply negotiate for the lowest cost. Once finalists have been selected, enterprises must work through the deal development and negotiation cycle to identify the solution set that best meets their requirements.

Negotiating IT contracts is an arduous, yet essential, task, as the contract is the deal. Yet many enterprises focus most of their time and attention on negotiating the price or achieving the best discount, and leave little time to negotiate the contracts. Or, worse yet, enterprises will inform a vendor that they have been selected, take delivery of the product and then start the negotiation process.

A well-constructed purchase contract documents how charges will be determined, how contingencies will be managed and the responsibilities of each party. A poorly constructed contract is often silent on how constrained products are allocated, how product and price changes are established and how they will be communicated throughout the term of the agreement.

Since the majority of hardware procurements are typically linked with some level of services, Gartner recommends that SLAs and statements of work be appended to the contract. Before negotiations start, the enterprise should select the negotiation team, develop a list of corporate objectives (“must have” vs. “nice to have”), prioritize and rank objectives, develop SLAs and metrics and, most importantly, know the vendor. The enterprise should negotiate carefully, following pre-established guidelines. Do not eliminate the vendor not selected, just in case negotiations fall through, but keep it informed as to its status.

Procurement Recommendations

Written by Edward Younker, Research Products

Analytical source: Frances O’Brien, Gartner Research

This article is an excerpt of a chapter from a new report, “Winning Asset Management Strategies.” The report is an offering of the Gartner Executive Report Series, a new business venture of Gartner Press that provides buyers with comprehensive guides to today’s hottest IT topics. For information about buying the report or others in the Executive Report Series, go to www.gartner.com/executivereports.

For related Inside Gartner articles, see:

This research is part of a set of related research pieces. See IGG-09242003-04 for an overview.