Overpaying for enterprise software, cloud infrastructure, hardware, and IT services happens a lot. Inconsistencies in market pricing make it difficult for buyers to determine whether a vendor’s pricing is within fair market value (FMV) range. The IT market is notoriously inconsistent in pricing, and it’s hard to find “comparables” to guide the assessment. It is difficult to discern what constitutes a fair price when a vendor routinely charges one customer 20 or 50 percent more than the next customer for the same solution.
Toxic Spend Across the IT Ecosystem
An acceleration in enterprise IT buying has generated an explosion in toxic spending across the IT ecosystem. The root cause can be traced to two systemic issues. First, companies today are making more IT purchases, more frequently, and with more vendors with whom they have less buying experience. This translates into more pressure on IT procurement teams, many of which are already resource-constrained.
Second, complexity and change within IT vendors’ licensing, subscription and pricing models are greater than ever. Part of this is a natural function of the IT vendor landscape where innovation, competitive pressures, and an ever-present need to appease shareholders drive change momentum. But there has been acceleration and volatility in these areas as well and IT buyers are feeling the bottom-line impact.
5 Factors to Determine IT Fair Market Value
To help you determine if vendor pricing is within FMV several factors should be analyzed. Here are five of the most important:
- What is a fair price for your solution requirements, regardless of vendor?
- Think of this one as a competitive pricing analysis. This is the acceptable cost range for any solution in the market that meets your requirements.
- What is a fair price based on what your vendor is charging your peers for a similarly scoped solution?
- Most buyers don’t have access to external pricing data. This is why it makes sense to work with objective pricing experts like SCS. We analyze thousands of enterprise IT deals a year and have visibility into what constitutes a fair price for your solution requirements.
- What is a fair price based on your existing spend with the vendor?
- How much you spend with a vendor has significant bearing on whether or not your deal pricing is quantifiably “fair.” This is one of many levers IT buyers can pull during the negotiation process to secure pricing that’s at or better than fair market.
- What non-price incentives should be negotiated with the vendor?
- Most IT price benchmarking efforts focus on the hard dollar savings. But it’s important not to overlook the value of soft dollar savings, particularly for those IT buyers that have a clear picture of their current and future-state IT roadmaps.
- For bundled solutions, what does line-item pricing look like and how does that compare to competitive alternatives as well as what your peers are paying?
Bundled pricing obscures what customers are paying for each component, and in turn, whether that pricing is within fair market value range. Customers should demand line-item pricing to be sure they’re paying a fair price for the elements they actually plan on using.
While IT buyers can consult their network of peers for purchasing/ renewal outcomes, the scope of visibility is typically limited to a few examples of anecdotal evidence. The good news is that IT buyers can now get access to price benchmark analysis, along with vendor-specific negotiation messaging to influence a vendor’s willingness to do a deal at a fair price that’s consistent with peer purchases in the market. If you want to learn more SCS’s benchmark analysis services, contact us. We’d be happy to discuss how our IT procurement advisors are helping organizations like yours save millions each year.