In this blog, Jay Rollins offers some real-life examples of how you can save your company money by reviewing the vendors it works with.
Starting at a new company brings with it a lot of opportunity for some homeruns. One of the low hanging fruits is strategic sourcing. Even in small to mid-sized companies, strategic sourcing can be performed. It’s the same as larger companies, but there’s still opportunity here. More and more technology vendors have specific sales incentives for companies of this size.
One advantage you have as technology leader in an SMB is that you can go through your financial system and review every vendor in accounts payable. OK, maybe the act of going through tens of thousands of vendor entries for the past three years doesn’t sound like an advantage, but when you’re done, I guarantee that you will have a clear picture as to where all the technology spend goes.
In my personal experience, I found different departments being responsible for different technology purchases, contract negotiations, and technology services and all of them had terrible terms. We had one WAN provider selling the company 56k frame relay for $2,500 per month with terrible service level agreements. Not only that, it was rolled up into the maintenance department operating budget.
We also found big security holes this way. One group purchased a consumer-grade cable modem for internet access while tied to the corporate network. We were able to track it down through the accounts payable review.
So how do you go through all this data? Manually. Get all the information into a spreadsheet and go through vendor names. Pull out the obvious ones into a different spreadsheet. Next, go through the remainder while reviewing the description and comment fields. (Note, if description fields and other info fields do not exist, you’ll have a hard time getting this under control.) Classify the types of technology into “sectors” such as infrastructure or telecommunication or application development. Include expensed cell phone bills and copy machines as a classifiers as well. Take anything that smells like technology. For one media and entertainment company, I included flat screen TVs and TV production equipment at least iniially.
To give you some idea how long this will take, for one year’s worth of data (about 300,000 entries) it took me two weeks, so six weeks all together. Don’t get discouraged, because this one is all about the journey. What you learn will be invaluable. Now you know where 95% of the technology spend is going and who is spending it. You also have a list of what vendors are working with your company.
I’ll try and articulate my decision-making process here, once I completed the exercise.
The first thing I did was present this to the CFO. I compared the IT operating and capital budgets to what the company is actually spending and pointed out a few major spends by sector. I also told him about my plan:
IT Services (telecom, hosting agreements, etc.):
- Take the obvious ones first (usually the biggest spend) and fix them quickly. Look at all the vendors and all the services performed or paid for in that “sector” and go through with a red pen. Note what is needed, what is fluff and pay special attention to what is the result of an over-zealous sales rep.
- Grab an RFP template and create an RFP for that service. Send it to the existing vendors, but also some larger ones that you have not done business with before. Research vendors and target ones that can provide all of the services for you.
- Do not take the standard agreement. Pay special attention to service level agreements and the penalties that are associated with them. You know what they should be thanks to the infrastructure exercise you just went through. Don’t take a standard agreement from these guys. Do your homework and make it work. If the vendor is inflexible on points, it should be weighted appropriately in your decision. Note that flexibility on penalties is not necessarily the highest weighted item. It needs to be taken into context with other things. Customer service and customer responsiveness are examples. In the event of an issue, you want someone that is going to jump in and help you solve the problem not someone who points fingers. That is the difference in coming back online in minutes versus days. Make reference calls. Include companies who canceled services. Sometime vendors will provide these but don’t count on it.
- Negotiate. Know what the growth plans are and promise the whole book of business for the vendors. This tells them that they need to be aggressive on pricing. Be willing to do a multi-year agreement (never more than 3) with the rights to re-price based upon market.
- Fill out the RFP checklist for each. Big things to look at include:
- Service Level Agreements and SLA penalties: They should meet or exceed requirements and penalties should demonstrate that they have skin in the game.
- Vendor reputation and vendor size: From references, they have a good reputation. In the event of an outage, you know via these references how they will perform for you. Vendor size is important. You need to weigh the size of your company with the size of the vendor. You need to be big enough to make sure they respond to you and they need to be big enough to provide as many of the services you need. This one is a balancing act. In the rare case, references can come into play. I found one very large vendor that had a history of treating smaller companies as very important customers. On the occasional small outage they responded appropriately, but note that if a bigger customer has a problem at the same time, they will get the preference. Watch out for vendors that are too small for you as well. They can implode under the weight of trying to service you.
- Price review flexibility.
- Capital versus operating. Some vendors will manage equipment you buy. One example I had was with telecom. We had a partnership with Cisco and Verizon wanted to charge a service charge for using Cisco equipment they provided. We leveraged our relationship with Cisco and the standards infrastructure we had designed to get routers in place that would later support Voice over IP, but that Verizon would manage for us. Everyone was happy.
- Award the contract.
- Partner. This is the important part. These companies are providing you a service. They need to be experts in their field. You can’t know everything about telecommunications and where their industry is going. Take advantage of executive briefings, webex presentations and trade shows that you are invited too. This may seem like a lot of time, but this is how you stay abreast. Also note, that the result of strategic sourcing is cutting down the numbers of vendors to just a few partners. This becomes manageable when you have only a few partners.
My next post will talk about special criteria when dealing with hardware and software vendors.