The trick to good PC buying: Consider total lifecycle cost
By Susan Avery -- Purchasing, 2/5/2004 2:00:00 AM
Thirty-two percent of respondents to a new survey by Forrester Research say they will increase spending on IT goods and services in 2004. Nineteen percent say they will reduce such purchasing. The re-searchers project that spending on computer equipment and software will grow 4% in 2004.
Results of the survey, which polled 800 technology decision makers at North American firms, also show that much of the increased spending will go toward replacing fleets of personal computers and upgrading Windows operating system software from Microsoft.
Corporate purchasing managers planning to buy new computers can help their companies better manage costs if they focus less on price and more on PC lifecycle costs, says Edward Bullen, Manager, Strategic Consulting, IBM. In his post, he helps companies streamline the procurement process and manage PC life cycle costs (purchasing through disposal). He also assists companies with rollouts of large numbers of PCs.
Before joining IBM six years ago, Bullen worked for Dow Chemical Co., where he developed the business case for a managed rollout of 32,000 PCs in 40 countries, more than 80% of which was completed in four months. The company's cost savings were significant. Since that time, Dow has refreshed its fleet of PCs every three years. Most recently, the company has begun a roll out of approximately 50,000 PCs. Of this figure, 93% of the PCs will be mobile. With this roll out, Dow expects to continue to reduce its costs.
In Bullen's experience, many buying operations place too much emphasis on reducing purchase price. He points to the recent popularity of the use of reverse auctions as an example. "If purchasing can change its cultural paradigm, and look at full life cycle costs, buyers can be more effective in how they acquire technology," he says.
For instance, at companies that have not refreshed their fleets of PCs in years because of the downturn in the economy, buyers will find support costs to be on the high end. In many cases, these companies are cannibalizing old PCs to keep newer models running; they're guarding against security breaches and viruses, and they're paying costly post-warranty maintenance. They may be running unsupported versions of popular software applications.
Once a company has decided to purchase a new fleet of PCs, Bullen advises his clients to examine landed costs such as shipping and handling. He suggests looking at costs to modify a standard PC configuration (adding more memory or hard drive) or to change models.
"It's one thing to understand your bid price, but I think very often sellers hope never to deliver on the pricing they quote. They will bid a certain spec, but then try to sell up to the customer." He points out that, at some companies, communication between purchasing and the accounts payable department is lacking. Once a buyer awards business to a supplier, no one is tracking to see whether the company is paying the price purchasing was quoted.
All but disappear
Costs of purchasing a PC run about 6-10% of the price. For buyers who frequently use reverse auction tools, the cost can be higher. By following some best practices—buying and deploying PCs based on a standards list in volume from a single supplier—IT purchasers can keep costs to a minimum. Specifically, Bullen suggests buyers look at:
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Process automation. Web-based ordering (available through most suppliers) coupled with a managed roll out of new PCs helps reduce purchasing costs to less than 1% of the price of the PC.
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Standardization. Selecting one or two models for the entire organization can help to reduce support costs by as much as 25%. Many companies pay lip service to standards, Bullen says. "They publish specs on a Web site then allow for customization. We tell our customers to limit customization to a specific set of variables that can be managed."
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Volume procurement. Building and delivering in volume is more efficient for the manufacturer who can pass savings on to the customer.
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Single source. Companies often pit suppliers against each other in the bid process or auction. "Purchasing usually lets them fight it out because they can get really good pricing, often below the waterline in terms of profitability," says Bullen. "Purchasing then keeps two suppliers. If one flakes out and can't deliver, purchasing can always go to its second supplier. But the reality is that if purchasing single sources it can get better pricing, based on volume."
Purchasing PCs through a single source isn't as risky as one would imagine, he says, pointing out that suppliers have ways to mitigate risk. One is price indexing. "When I was a customer, IBM told me they were going to give me an aggressive transaction price, which is the upfront bid price. At the same time, they were going to estimate what that same price would be in nine months, average the two and give that to me so I could get better-than-aggressive pricing. If I bought more upfront, I would save a lot of money. In nine months IBM said they would check the price and told me if it were off, they would refund the difference. There were no downside risks." Third-party indexes are also available through organizations such as IDC.
"This way, purchasing doesn't have to go out to bid so often because they have assurance that their price is going to remain competitive in the marketplace," he says. From my experience, suppliers are willing to be creative. I thought what IBM did for me was creative and, in fact, I invoked the clause from time to time."
Another way to mitigate risk is through a supply guarantee. As a customer to IBM, Bullen worked it out that if IBM couldn't provide computers under the agreement, they would offer an alternative of equal or greater value at no extra cost.
"In the middle of a rollout, which comprised about 32,000 PCs, there was an earthquake in Taiwan and the worldwide supply of 15-inch monitors dried up overnight. So IBM sourced 17-inch monitors, which at the time were twice the price and sold them to me for the price of the 15-inch monitor so I could continue the roll out."
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