Average Markup Being Paid to IT Suppliers Going Up – Not Down

KnowledgeBus, part of Mercato Solutions, which benchmarks prices for IT procurers, has surveyed 200 IT buyers with annual budgets of over £50,000 across 29 sectors about their purchases. This is the fifth year that this spend analysis has been carried out, benchmarking regular product prices paid against trade-level IT product data housed within the KnowledgeBus IT application, which automates comparison of purchases against daily trade guide price and stock levels of 150,000+ IT products from 2,500+ manufacturers.

While the previous four reports have shown buyers becoming shrewder about IT purchases, with a gradual reduction in the average mark-up being paid to suppliers each year, the 2016 analysis shows the trend to be quite in the reverse. The result of the EU referendum certainly caused a shock to IT prices, making them fluctuate more widely than seldom seen before, this made it harder for buyers to keep control of supplier margins. Unfortunately, this was a time when the more unscrupulous suppliers could take advantage of the confusion caused by price inflation.

Now, as we know, price comparisons are only worthwhile if we are also considering the specifications, and comparing like-for-like purchases, which we assume the study does. So, that said, the report is now available and reveals some quite shocking headlines, such as:

  • Margins paid to suppliers have risen for the first time ever – up to 18% from 17.6% the previous year. It is worth noting that industry best practice, as specified by the Society of IT Managers, states that organisations should not pay more than a 3% margin to suppliers.
  • One buyer in the university sector paid an astonishing 20 times the trade price – for cables. This is an extreme example, but several organisations were found to have paid more than 10 times the trade price for products.
  • This year’s best performing sector, the police, paid out an average of 11% for its IT purchases. Yet one buyer in this sector still paid a supplier a 970% margin for an order of flash drives.
  • Prices overall increased by an average 12.7% in the months following the Brexit vote – with some vendors putting up prices by as much as 45%.

The report holds more quite worrying facts, but what it does do is give an insight into how suppliers come to be in such a position of leverage. That, it puts down to the nature of IT itself. “Technology is like no other category of buying,” it says, “it’s a rapidly evolving sector with new advances being rolled out to the market continuously. Consequently, technology products have a limited shelf-life and the constantly changing landscape makes benchmarking difficult – especially as prices can be extremely volatile.”

It looks into why procurement doesn’t always have a grip on what the costs should be, and explains why last year in particular was a uniquely challenging environment for IT buyers in the UK. So senior management can’t put the blame squarely at the feet of the procurement professional. More importantly, it gives advice on how to prevent suppliers getting away with such high margins.

The report itself is graphically very well presented: it lays out its raw data in a simple format – so you can see the differences for yourself – it gives clear examples of high margins, and gives a whole year’s worth of month-by-month trade impactors. In fact, it’s a very useful and informative read. And not too long at 12 pages; it is easily digestible and dissectible.

You can download the whole report (pdf) here

 

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