What Makes a Good Deal?
Updated: Jun 5, 2020
How do you know if you’re getting a good deal? We’re asked this question constantly. If you’re buying a house, you can check Zillow to see if you got a good price, and when buying a car, you can check TrueCar, but in the world of IT, there’s much more than the price to figure out if you got a good deal.
To fully answer the “Is this a good deal” question, we must understand three components:
Is the pricing competitive?
Is the risk understood and acceptable? and,
What impact will this deal have on our internal and external relationships?
Only after fully exploring these three questions will you be ready to sign.
The old way to tell if you got a good deal was to look at a benchmark and try to apply the price times quantity equation (P x Q = Deal Price). The thinking: if I buy a certain quantity, then I should get a certain price. Also, “If I squeeze them hard enough, I’ll get my price,” is a point of pride among some buyers, but experience has shown that this approach rarely works in IT. There are far too many dependencies, the switching costs are way too high, and the supplier base is fiercely competitive. It’s not simple, as much as we all wish it were. Here’s why: IT suppliers use value-based pricing systems to capture differentiated pricing for their solutions. But what does this mean?
This chart shows our top 30 suppliers by case volume, plotted by the maximum discounts they provide clients. Now imagine you’re trying to apply the P x Q = Deal Price equation. Three of these suppliers don’t even have list prices – how do you benchmark something that doesn’t have a price? Half of them use pricing systems that allow discounts of greater than 90% off list price. In other words, based on this information, the vast majority of the top 30 IT suppliers have absolutely no pricing integrity whatsoever. And because the numbers (price and quantity) are typically so high, focusing on price or discount percentages is very risky.
Let’s turn to the other variable, quantity. This is not simple either, because in an IT deal, you’re buying more than a simple commodity. You commit to agreements with varying degrees of certainty, and any changes to your plans carry a wide set of risks. The “Q” can mean many different things over time. Do our usage rights align to how we may want to deploy the solutions? How do we judge deployment risk and growth options? It’s complicated. Then you must consider what happens at the end of the deal. What else do you buy that has such a long shelf life and lengthy list of issues? All of this must be examined to truly understand what you’re signing up for, and what makes a good deal.
In addition to a supply base with no pricing integrity, using contract terms and conditions that are extremely complex, there’s the intense pressure from stakeholders for fast solutions that enable corporate strategy. These stakeholders are operating in a world being rocked by M&A activity, cost transformation, cloud migration, digital transformation, and an evolving relationship between the business and IT, as many suppliers try to by-pass IT and deal directly with business units. The making of a good deal must consider all these factors.
What’s at stake and why does all this matter? Our experience has taught us that there’s 30% in each of your IT spends that’s available to save -- or utilize on something else to add value to the organization. To capture that 30%, IT deal makers must switch from chasing a price to pursuing leverage. Because only by building and managing leverage will you succeed in making a good deal.
Leverage consistently yields the best outcomes, and it comes from deal preparation, having Plan Bs, having time on your side, and keeping your suppliers guessing at your intentions. These best practices neutralize supplier sales strategies, and level the playing field with suppliers.
To summarize: Great deals are made by savvy IT deal makers, those who have shifted their focus to building and managing leverage.
Jack Garrahan is President and CEO of ClearEdge Partners, and the creator of the Leverage Management Maturity Model (LM3).