IT costs an efficiency blind spot

Lax procurement processes and supply chain management are leading to unnecessarily high spend on IT equipment in utilities says Al Nagar. Downward pressure on operational expenditure under totex will bring this into focus.

Search for “utilities” in Google and you’ll be bombarded with stories ranging from consumer energy bills to the latest on renewable schemes, and, more recently, suggestions to nationalise the major power providers. Put simply, the utility sector is facing a lot of complex issues right now. Against this backdrop, organisations are experiencing increasing pressure from regulators to present detailed, transparent plans that can justify both capital and operational expenditure.

Capital expenditure will often hit the headlines, but general expenses of a business are more likely to slip under the radar and go unnoticed. A large aspect of this includes the purchasing of larger value IT equipment such as laptops and smartphones, right down to smaller items like USBs and network cables.

This often makes up a huge chunk of spend, especially as UK utility companies traditionally invest more in IT than any other country in Western Europe. In fact, predictions for spending last year were estimated to reach $10bn.  

“The utility sector is paying average mark-ups of 17 per cent – and in extreme cases up to 300 per cent – above the trade price for IT equipment.”

Al Nagar, Knowledgebus

However, it has become clear the utility sector could be doing a lot to get more from IT budgets.

Industry best practice – as outlined by the Society of IT Managers (SOCITM) – states that the margins paid on IT equipment should exceed no more than 3% of the trade price. Yet a recent survey from KnowledgeBus, which reviewed the margins being paid on IT equipment, revealed that the utility sector is paying average mark-ups of 17 per cent – and in extreme cases up to 300 per cent – above the trade price for IT equipment.

Given the scrutiny that the industry faces to maximise budgets and avoid additional costs to the end customer, this is a huge cause for concern. Why then are we still falling short when it comes to securing the best price for IT? And at what cost?

Monitoring fair price levels on IT products can often seem like an uphill struggle, with several elements to consider at any one time. Fluctuating exchange rates, overseas delivery charges and new products arriving on the market are all major considerations as buying teams look to navigate best value.  

We’re also now seeing a huge increase in the range of devices and technologies, with a lot more choice available to buyers. The technology market is constantly moving – one single day last month (July 17, 2015) saw 1,174 new products hit the shelves.

In a largely volatile market, understanding the margins that you’re paying on top of trade value can be challenging – particularly when considering that trade prices fluctuate on a daily basis. This means that buyers can easily spend significant time scouring data, analysing and monitoring the market to find the best possible price. 

There’s a common misconception that it’s only the larger, high-value purchases that require detailed analysis. It’s easy to see why teams may spend more time mulling over larger purchases – they can often be sensitive or may underpin a larger digital strategy which goes hand in hand with greater risk and scrutiny.

Yet it is actually often the smaller items on which the biggest margins are paid. As KnowledgeBus’ IT margins survey revealed, those mark-ups can be as much as three times the value of the trade price for utility businesses.

The cost of these smaller or one-off purchases should not be underestimated as they can total up to around 25% of the overall IT budget.

It’s crucial that utility businesses become more proactive in reviewing their IT spending in these areas. A more in-depth knowledge of the IT supply chain and how factors can influence IT product prices is crucial – from understanding technology product life cycles to the effect of currency fluctuations and raw material prices. This knowledge supports more strategic procurement and timely purchasing when prices are most favourable.    

Buying teams can also tackle inflated margins by enforcing more open and transparent negotiations with IT suppliers. A further approach could be to engage in benchmarking activity and bringing together market data to compare and define best price on purchases.  However, the increasing challenge of establishing what is a benchmark trade price is always going to be a tough ask given the regular movements of IT product prices, but technology does exist to support this task. 

These methods can support buyers looking to make more informed procurement choices and stretch the reach of existing IT budgets.