• How to avoid paying higher margins than you should

Executive summary

With a highly volatile IT market where cost price and stock change all the time, it is hard for IT buyers to keep apace of this real-time data and secure value for money consistently.

As a result the majority of organisations are paying too much for IT and this research paper highlights which sectors are paying more than they should, and reveals the level of previously unknown markups being paid.  Plus, discover key market impactors and statistics you need to be aware of as an IT buyer.

Introduction

Monitoring reasonable price levels for IT products can be difficult, as costs fluctuate so frequently.

It is not unusual to see a fifth of all products alter their trade price on a daily basis - analysis of more than 150,000 IT products in the UK market over a 30 day period has shown this to be the case.

Although these prices increase, and decrease, it is essential to recognise that the typical trend is for costs to fall over time. If buyers aren’t aware this drop can allow suppliers to inflate margins without them realising.

This study of IT margins has revealed that numerous organisations are falling victim to insufficient transparency. The majority are paying markups several times the trade value of the product - one organisation in the NHS paid a margin nine times more than the price.

This report will examine these extreme margins and explain how suppliers have the ability to change such excessive markups. Additionally, it will review the typical margins being paid by organisations across different sectors and reveal how far away businesses are to achieving best value.

The study will ultimately reveal how organisations can fully understand margins and stop paying this avoidable business cost with greater supply chain understanding.


Price Fluctiations
It can be problematic for IT buyers to keep informed of the  margins they’re paying since the trade cost of technology products fluctuates more often than products in any other category.

Office goods such as stationery, as an example, hold their real term value from  one year to the next. A new pen will cost the same amount today as it did 12 months ago as the item will remain the same. The characteristics of technology, however, means that better models and alternatives are constantly available on the market, and they devalue existing products.

There are, obviously, factors that push prices up including the global cost of raw materials (e.g. copper) or a natural disaster (e.g. the Japanese tsunami of 2011) impacting on production, but as a general rule the typical trend is for the price of IT products to fall over time. How big this price drop is will vary. It depends on several factors including the calibre of your competitors and quantity of stock, manufacturers have left in the supply chain. As an example, a manufacturer may

make a laptop with the goal of selling it at £1,000 at the beginning of its lifespan and £700 at the end. If there is stiff competition, however, they might be left with an over-abundance of stock and drop the cost to £500. A manufacturer might even sell at cost, or lower, to be able to recover some of the investment producing those units. This is before taking into consideration the complex changes that may be applied to products that pass via a global supply chain from manufacturer into distribution to reseller to customer. What does this all mean for a buyer? Well, achieving the optimum price requires knowledge of where the current trade price lies and the amount of stock available in the market at any given time. With this specific knowledge, IT buyers can gain insight on the margins being paid and whether they’re getting the most effective price.

Increased scrutiny
If IT buyers can apply the degree of scrutiny to all purchases, in the same way, they do for large orders, they would reduce the risk of paying excessive margins.

Organisations often reduce time spent vigorously negotiating every purchase by putting contracts or frameworks set up that ensure suppliers only ever charge an agreed maximum margin above the trade cost on all sales.

However, this ‘cost plus’ approach and off-contract purchasing must be policed, needless to say, to ensure maximum value and that any contract is being respected. Businesses can easily do this with access to up-to-date and supply chain information.

Buyers often try and acquire market and supply chain stats via Google or ecommerce stores, however, this data is never in real-time and certainly won’t indicate special framework pricing, new product introductions or open book pricing.  Furthermore, the amount of manual time buyers are spending trying to acquire and compare this out-of-date data acrossmultiple product lines is regularly seeing the process rendered useless apart from identifying which supplier is cheapest on the day.  It does little to identify margin being paid.

Indeed, the cheapest product, and apparent good deal, might in fact be an End Of Life item that is being discontinued and has simply been bought in bulk by the supplier to steal share and margin.  Marketplace technology like The IT Index does exist, however, to aggregate and compare multiple products from multiple suppliers, and provide IT supply chain insight by updating price and stock movements unique to vertical sectors as they happen.  So, IT buyers can focus on selecting the right product before buying with confidence.   

Paying above the odds
A review of margins paid for IT across 20 sectors in the UK using supply chain data and spend analysis.

The study revealed that the typical margin or markup paid by organisations, across all sectors in 2014, was 19.7% above the trade cost. Which is a way off the industry best practice margin (3%) - as specified by the Society of IT Managers (Socitm).

Although these margins remain high, the results are actually a substantial improvement on the prior years.  Average margins in 2012 were 24.8%, whilst in 2013 they dropped to 21.1%. 

This suggests organisations are improving at scrutinising their purchases or, alternatively, suppliers are experiencing more strain from their competitors in order to win business.

Some sectors have achieved notable progression in curtailing margins within a three year period. The Housing Association sector, specifically, has managed to cut back its average margins from 36% in 2012, and 24% in 2013, to 20% in 2014.

Other sectors, however, seem to be heading in the wrong direction. Education, as an example, had average margins of 12% in 2012 but this crept up to 19% in 2013 and 23% in 2014.

Average margin performance over time



Extremley high markups

Though there is a slight decrease in average margins being paid generally, the study revealed it’s still common to see extreme one-off margins being paid across all sectors.

One organisation in the NHS was found to have purchased an IT product with a 920% margin in 2014. One charity was also revealed to have paid a 711% markup. The scale of the margins is likely to be a clear reason for concern in sectors where there’s a definite onus to control costs.

These margins weren’t only high, they were also significantly greater than any margin recorded in 2013 - when the highest markup was 673%.

When average margins are decreasing it could seem strange that extreme margins increasing. You can, however, find reasoned explanations why this might be happening.

Recently, IT managers and procurement professionals have come under increasing pressure to regulate expenditure. Consequently, a multi-site desktop refresh, as an example, probably will come under intense scrutiny.

To achieve value for money, buyers will look to secure the most effective price possible through a variety of tenders, negotiations and benchmarking. This really is helping to cut back average margins.

When it comes to one-off or low-volume purchases, however, exactly the same degree of scrutiny isn’t being applied. Which is allowing suppliers to inflate margins and charge prices higher than the trade value.

In most cases, they’re smaller value purchases, which might be a distress item or perhaps a spontaneous buy - and they’ll often fall below the radar. These could well be simple things like extension cables, USB flash drives and SD cards.

Even though the scrutiny might not be as tight on these products, they ought to not be neglected because they mount up and often make up a bigger than expected percentage of the budget - in some instances as high as 25%.”

Highest Markups paid over time

Conclusion
This report has shown that IT buyers are not securing the deals they once thought they were.  And, it’s clear the volatility of the supply chain continues to make it difficult to determine what is a fair and competitive price at an equitable margin.

Given the economic climate of recent years, more scrutiny has clearly been applied to prices paid and this has driven down margins across the piste overtime, however, there are still many one-off purchases being charged at very high margins.

IT buyers need as much support and market data as they can find to inform purchasing and provide leverage with suppliers. 

Yet, the report has shown that finding this data is a great challenge initself, never mind undertaking any form of validated comparison across multiple suppliers on multiple products, which of course consumes precious time and requires manual administration.

An alternative is to access innovative marketplace technology that brings together multiple IT suppliers to compete for business in real-time on thousands of products and services, so automatically driving price down in an open book fashion.  The IT Index is Europe’s largest IT marketplace for business and it delivers ‘live’ catalogues automatically comparing and ranking best price with stock.  Free login also gives users access to personalised catalogues and special pricing associated with their sector.

Register for Probrand's digital marketplace today