June 15, 2009 by Refael Keren
In uncertain economic times, the IT department will be called upon to contribute to cost cutting efforts within the enterprise. With over half the IT budget allocated to purchasing goods and services, poor purchase planning and wasteful purchasing may represent potential for budget improvement. Manufacturers can use a combination of common sense and adherence to some tried and true purchasing principles to cut the fat from IT procurement.
According to Info-Tech’s last “Budget and Staffing Report,” the purchase of Hardware/Software, IT and Communications Services, as well as Supplies makes up 53 per cent of IT spending on average. It follows that the purchase process itself has the potential to affect IT’s bottom line. A common mistake in the enterprise’s effort to cut costs in technology procurement is to blindly place price over product performance. The resulting cost of “purchase failure” is likely to be more substantial than savings realized by selecting an inferior product or service since a failed solution has to be corrected with a purchase that works.
THE TOTAL COST OF PURCHASING
Enterprises with low purchase maturity have the potential to realize additional gains by improving several aspects of the purchase process, but there are associated costs to purchasing which may not necessarily be measured, and are therefore more difficult to identify.
• Administrative costs. The amount of time spent defining purchase needs, searching out vendors, evaluating and selecting vendors, negotiating contracts, and managing vendor performance results in significant person-hours.
• Opportunity costs. Opportunity costs. A foregone opportunity to realize cost savings should be seen as a loss, particularly in the case of commodity-like purchases, where cost is a higher factor than performance.
• The cost of fixing poor purchase decisions. Where hardware, software, or a service that does not fulfill the purchase need, or where the product or service yields inadequate performance, an additional solution or modification has to be provided leading to unnecessary costs.
The unmeasured costs of purchasing are diametrically opposed. On one end of the spectrum, too much effort on low risk purchases represents wasted administrative costs, and on the other end, poor planning for complex purchases could result in purchase failure. Resources allocated to procurement should have a direct relationship to purchase significance.
FACTORS OF PURCHASE SIGNIFICANCE
The significance of a purchase is a culmination of several factors, including purchase cost, purchase risk, purchase impact and purchase complexity. These factors answer two questions: how likely is this purchase to go wrong, and what will be the impact?
• Categorize purchasing by significance. This means that cost, impact, and risk of a lease, purchase, or contract must be quantified in order for the right amount of purchasing resources to be allocated. Reduce the risk associated with significant purchases by formalizing the requisition process, and ensuring that greater time and effort is spent in the selection, evaluation, negotiations, and post-purchase vendor management processes.
• Clearly define purchase needs. Avoid having to make the purchase twice by ensuring purchase needs are clearly defined for both business needs and technical specifications.
• Aggregate purchasing. Combine orders to reduce shipping costs, and to benefit from greater vendor discounts. Consider going through a Value Added Reseller (VAR) that can combine purchases from multiple vendors of hardware and software. Evaluate purchases across the enterprise that could potentially be combined into larger volume purchases.
• Eliminate or reduce carrying costs. Resist the temptation of purchasing in bulk and unnecessarily carrying inventory. This reduces loss due to shrinkage, obsolescence, or spoilage, and won’t tie up the IT budget unnecessarily.
• Retain expertise by capturing knowledge. Reduce time spent researching purchases by keeping records of past purchases, maintaining lists of standard purchases and preferred vendors.
• Build a purchase manual. Put together catalogs of standard purchases for lower significance items that have already been approved by the IT depart
• Preferred vendors list. Benefit from existing relationships with vendors. Keeping records of those vendors who may have offered the enterprise trade discounts saves time the next time around.
• Rate and record vendor performance. Keep track of on-going vendor relationships, particularly relationships with technical services such as Telcos and ISPs where service levels will determine contract renewals.
Cost-cutting enterprises can find savings in improved purchasing practices, but compromising on service and performance will only increase costs in the long run.
Refael Keren is a Research Analyst with Info-Tech Research Group in London, Ont. You can reach him at firstname.lastname@example.org.
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