Retail sector found to be paying up to three times too much for IT purchases, study finds

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Suppliers are exploiting a lack of transparency in the IT market to inflate product prices, according to the annual KnowledgeBus IT Margins Benchmarking Study.

Now in its fourth year, the study shows that the practice of charging excessive margins by suppliers is still commonplace across the retail sector.

Identifying the best price for IT products is notoriously difficult, given the short lifecycle of products and the constant fluctuation of trade costs. Although industry best practice, as specified by the Society of IT Managers, states that organisations should not pay more than a 3% margin to suppliers.

Despite this guidance, the research revealed that one supplier successfully charged a retailer a margin of 215% for an order of cables.

The study suggests that awareness of the high mark-ups charged by some suppliers may have begun to filter through, however. The average margin paid across the retail sector was actually found to have come down to 11% in 2015, from 13% in 2014.

Retail is this year’s best performing sector, having managed to reduce its average margins from 35% in 2012 to just 11% in 2015.

Al Nagar, head of benchmarking at KnowledgeBus, said: “Organisations are getting better at scrutinising purchases and negotiating better deals with suppliers. But the analysis shows that many purchases are far in excess of industry best practice.

“The most extreme example of excessive margins are regularly found on those lower volume, spontaneous, ‘as and when’ purchases. These are typically unplanned purchases consisting of items such as memory sticks, power adapters and cables.

“All procurement officers need to be aware of this trend. Although this type of purchase may be perceived to be of a lesser value, compared to major pieces of IT infrastructure, they can make up a good 25% of the IT budget. By the end of the year, this can easily add up to a six figure difference to the overall IT budget.

‘‘Today’s procurement managers don’t have endless amounts of time to talk to multiple suppliers to find the best price. What they need is for there to be greater transparency between suppliers and customers. With the right tools organisations can gain that transparency and bring those margins down to 3%.’’

For organisations looking to achieve best practice levels on IT product purchasing, Al Nagar offers three key tips:

1. Benchmark

Organisations can empower their negotiators, and speed up the IT procurement process, by deploying benchmarking tools. This provides IT buyers with access to up-to-date and validated trade level information that will identify the exact margins suppliers are charging.

2. Agree ‘cost plus’ contracts

Companies can agree ‘cost plus’ contracts with their suppliers to ensure no IT product purchased exceeds an agreed maximum margin level. Procurement teams can use their benchmarking tools to police these contracts.

3. Monitor price trends

By analysing historic or seasonal trade price trends, IT buyers can identify the best times to buy. When trade prices fall to their lowest, suppliers often try to maximise margins achieved, but by monitoring the market, companies can counter this practice.

KnowledgeBus surveyed 200 IT buyers with annual budgets of over £50,000. A detailed spend analysis was undertaken with each of several organisations covering 24 sectors in all, benchmarking regular buy products against trade level IT product data housed within the KnowledgeBus IT application. 

KnowledgeBus is a benchmarking application for IT procurers. It automates comparison of purchases against daily trade guide price and stock levels of 150,000+ IT products from 2,500+ manufacturers.  It provides market knowledge that helps buyers negotiate better deals with suppliers to get more from their IT procurement.  It is accredited by the Chartered Institute of Purchasing & Supply (CIPS).

KnowledgeBus is a product of Mercato Solutions – a multi-million pound award-winning enterprise application provider. The business has a global client base and provides software platforms and applications that transform business processes.

League table ranking organisations paying too much for IT in 2015

Sector

Average margin 2014

Average margin 2015

Highest Margin 2014

Highest margin 2015

Banks

16%

14%

254%

450%

Finance

14%

19%

338%

465%

Insurance

20%

22%

133%

327%

Housing Associations

20%

19%

711%

458%

NHS

22%

20%

920%

962%

University

15%

15%

614%

622%

Construction

10%

16%

92%

443%

Further Education

25%

687%

Legal

15%

17%

103%

557%

Charity

21%

14%

850%

535%

Oil

24%

380%

Travel and Tourism

20%

560.4%

Central Government

18%

584.3%

Rail

17%

450%

Retail

13%

11%

472%

215%

Accountancy

14%

501%

Fire Service

14%

224%

Freight and Logistics

12%

225.2%

Telecoms

19%

19%

407%

989%

Councils

21%

19%

323%

1095%

Pharmaceuticals

19%

20%

120%

355%

Utility

17%

28%

300%

723.6%

Manufacturing

24%

12%

499%

565%

 

 

Consultancy

35%

14%

392%

315%

 

Copyright 2015: Mercato Solutions KnowledgeBus IT