Suppliers charging up to 11 times cost on IT

29 June 2016

Suppliers are exploiting a lack of transparency in the IT market to inflate prices, according to a study released yesterday.

KnowledgeBus’s annual IT Margins Benchmarking Study shows that in 2015 buyers have paid up to a 1,095% mark-up on IT products despite warnings not to pay more than 3%.

This is expected to get worse as the pound continues to struggle against the dollar and other currencies following the UK’s Brexit vote.

Head of benchmarking at KnowledgeBus, Al Nagar, said: “We witnessed more than 26,000 price rises on Friday 24 June alone.

“Although this is a lot in a day, it’s likely to be the tip of the iceberg.”

Given the short lifecycle of IT products and the constant fluctuation of trade costs, identifying the best price is notoriously difficult, said KnowledgeBus.

The latest study shows the utility sector paid the highest average margin of 28% in 2015, while further education was charged a 25% mark-up and the oil industry 24%.

The Society of IT Managers advise that buyers should not pay more than a 3% margin to suppliers.

However, research in this study showed in the worst instance one local authority was successfully charged a 1,095% margin by a supplier for an order of SD memory cards. The second biggest margin was paid by a company in the telecoms sector, which 989% above cost on printer products, while third place was taken by an NHS body that purchased IT peripherals with a 962% mark-up.

“All procurement officers need to be aware of this trend,” Nagar said.

“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.

There is a worry that after the Brexit vote suppliers may take advantage of the ailing pound by raising prices unnecessarily.

Nagar stressed that Buyers should scrutinise prices like never before to ensure suppliers are being transparent on their pricing and not claiming incorrectly that prices have gone up.

Nagar offers three key tips:

1. Benchmark

Organisations can empower their negotiators, and speed up the IT procurement process, by deploying benchmarking tools.

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. 

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