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When the going gets tough, CIOs simplify

October 18, 2009

A Fortune 500 bank is evaluating options to slash its infrastructure management and data centre partners from 10 to two, while one of the world’s top five retailers is looking at reducing its technology vendors from 80 to 30, reported Economic Times.

Meanwhile, a Fortune 50 drug maker that once wielded a 100-odd vendors’ list dealing in data mining, drug distribution and supply chain management, now wants it reduces by half, reports another newspaper.
What do these trends indicate? That in the months to come, technology buyers are going to simplify the rules of the game. Growth will increasingly be a function of increase in market share through vendor consolidation. In other words, the focus will now shift from pricing to maintaining a razor sharp vigil over margins.

This is especially true for companies like Applied Materials, Best Buy, Cardinal Health, Home Depot, Verizon, Chevron, who may presently have 40 to 100 vendors on their rolls but are planning to prune the number to five or six, maximum. According to one analyst almost 60% of the Fortune 100 will prune their technology vendor list in 2009-2010. The objective would be to gain economies of scale, get better pricing by increasing volume of work to a limited few, tried and trusted suppliers, and reduce their overhead maintenance costs.

outsourceVendorConsolidation When the going gets tough, CIOs simplify
This means we are likely to see more mid-cap IT suppliers getting the short end of the stick. They may still be cutting deals but increasingly, these would be low-end, thin margin deals. The lion’s share would of course go to big vendors’ kitty, namely to Genpact, Converges and Accentures of the IT world.

Therefore, its time for smaller IT companies to either shape up or be shipped out. A study by ASG reveals that over 30% of CIOs and CTOs tend to eliminate a vendor from their consolidated list on negative feedback from their peer group. They don’t really rely on industry analysts as much as they do on the market buzz about a vendor.

There can be no denying the fact that maintaining and managing relationships with one vendor, any vendor for that matter takes time, effort, and resources. Yet big enterprises tend to maintain not one but numerous IT vendor relationships in order to de-risk their business and reduce their overdependence on any particular vendor. Reducing the number of IT suppliers not just limits the administrative load but can also win volume discounts. However, a big risk in vendor consolidation is vendor lock-in. Vinnie Mirchandani has an excellent post on this subject in Why I am not an Apple Fanboy. He writes, “The benefits of vendor consolidation are grossly overrated. Split your dollars across many vendors. Also, vendors often misinterpret long term relationships as license to pull lock-in shenanigans. Benchmark them constantly and refresh your vendor base periodically.”

This is especially true in the case of enterprise software, such as ERP, CRM, business intelligence, and supply chain management systems. Once these systems are in place, it is very difficult or rather foolish to switch. The bottom line is that productivity or technical simplicity cannot be sacrificed at the altar of administrative simplicity. Servicing dozens of contracts worldwide may represent an unwieldy situation and has many built-in inefficiencies, but at times there may be a compelling need for better pricing and for simplifying the existing IT infrastructure for specific results. In the end, a vendor consolidation strategy has to be integrated into your business plan with the clear goal of improving your service levels while cutting down on the unnecessary expenses.

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Written by Radhika · Filed Under Outsource Blogs 

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