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Managing the vendor relationship: Tough economy means give-and-take

Money is tight everywhere, for both IT departments and vendors. But although the slowing economy may in some cases give the vendor the upper hand, there are still ways you can negotiate to get more from those relationships. We'll tell you how.


The signs are all there: It's going to be a tough year for both CIOs looking to move ahead with tight IT budgets and for vendors trying to sell products and services at the best price possible.

One would think that IT buyers would have the upper hand in a tight economy, but surprisingly, that won’t be the case overall, as certain industries and market segments are working in favor of product manufacturers and service providers.

In this article, we’ll examine some general IT industry spending trends, and I'll share some tips that can help you find ways to get more from your vendor, even in difficult economic times.

Money’s tight everywhere
CIOs will most certainly have less to spend this year. Numerous studies by market research firms all come to similar conclusions: CIOs will see little growth in IT budgets. According to Cambridge, MA-based Forrester Research Inc., tech budgets will grow only 2.2 percent this year and aren't expected to attain double-digit growth until 2004.

Managing the vendor relationship: Who’s got the upper hand?
Part two of this three-part series will discuss how CIOs are leveraging buying power to get more from their vendors and how some are demanding more support and better prices. The final installment will focus on how some vendors may still have the upper hand despite a tough economy, especially in specific segments of the product/service market, including security products and services and Web site content management.

Forrester's IT budget findings sound about right, according to some corporate managers. “Budget restrictions have meant we’ve had to put off some projects,” said William Perkins, director of IS at a Midwest insurance company. “The only projects we are going ahead with and funding are those that are essential for us to run our business,” said Perkins, adding that the project slowdowns began about the middle of last year.

Perkins is not alone. In general, CIOs are looking for more immediate solutions to their problems and a strong return on investment with virtually all purchases. Industry pundits note, however, that there are possible exceptions in some market segments, such as security and disaster recovery products and services, due to increasing security concerns worldwide.

One tech manager, who requested anonymity, said that he is no longer interested in the annual product upgrades vendors have “shoved down [his] throat.” The manager plans to make due with what is working and will only consider an upgrade when there is a very significant product improvement.

For many, tighter budgets and more careful funding of projects started midyear last year, and vendors immediately felt an impact. In the third quarter of 2001 (the last quarter for which complete numbers were available at press time), Scottsdale, AZ-based Cahners In-Stat Group reported that many segments of the networking equipment market were taking a hit. Packet telephony gateway revenues dropped 7.2 percent from the second quarter alone. And, while the number of Layer 2/3/4-7 switch ports grew 7 percent from the second quarter, the revenues for those switches dropped 3 percent. Cahners predicts only single-digit quarterly growth through the middle of this year.

How CIOs can take advantage
CIOs need to remember that although their own IT departments' tighter budgets will make for a rough road ahead, the vendors are not much better off, and there are still opportunities to negotiate for better deals and service.

In essence, CIOs should still be asking their vendors, “What can you do for me?”

The obvious place to exert pressure on a vendor is in pricing. For example, companies could save between 20 to 50 percent on network equipment if they sought competitive bids rather than relying on just their current vendors, according to Gartner Inc., an IT research firm based in Stamford, CT.

Some CIOs report, however, that getting multiple bids has not brought any cost savings, as most vendors are holding pricing levels for the time being.

CIOs can also realize an advantage by seeking more help from vendors to sweeten the deal. For example, you might ask for more systems engineering help before a sale is made and for more support once products are purchased.

According to Erik Giesa, director of product management for Internet Traffic Management products at networking equipment manufacturer F5 Networks Inc. in Seattle, vendors are responding to requests for these additional kinds of help: “In the presales cycle, you are seeing more hand-holding today,” he said.

In some markets, the vendor still has upper hand
Increased support help requests and pricing cuts won’t be forthcoming in all market segments, however.

Security and disaster recovery, for example, have been buffered from the IT spending crunch, due in part to the increased spending in these segments as a result of the Sept. 11 terrorist attacks.

In addition, the growing threat from distributed denial of service attacks and worms like Code Red are forcing companies to look for security products and services. Vendors in these markets, then, are not likely to be as flexible as in other segments where the demand for products and services is not as great.

In the next installment in this series, we’ll talk with CIOs and companies who are benefiting from the current economy and getting a little more for their money in terms of products and services.

How do you manage your vendor relationship?
Do you have a set approach for working with vendors? If you have a method that seems to work, tell us about it in an e-mail, and we’ll share it with other TechRepublic members.

 

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