Seven Ways Companies Overspend on IT

In 2010, it was essential to align IT with business demands, but it was like walking a tightrope. While some companies kept their balance, others took quite a fall. Even so, many companies that had viciously cut IT budgets continued to overspend on information technology.

NPI estimates that companies overspent by more than $207 billion on technology and telecom purchases in 2010. Many of the culprits are familiar, while others are indicative of trends shaping enterprise technology spending.

Here are seven ways companies overspent on IT last year, as well as advice on how you can avoid making the same mistakes this year.

1. Cloud unreadiness. Not every application or IT operation is ready for the cloud, but companies have spent a lot of money ignoring this problem. If the majority of your applications are closely tied to underlying hardware, you can easily spend more than you?ll save to achieve status quo functionality. It?s imperative that companies perform a cost-benefit analysis for each application to determine whether a move to the cloud makes sense.

2. Paying too much for too much support. Software and hardware support continued to drain IT budgets in 2010, with the average enterprise overpaying anywhere from 8 to 25 percent. The problem is caused by several things.

First, software vendors continue to escalate pricing through annual rate increases. Second, many companies insist on premium support levels when they are better suited for a lower tier?or even outsourcing. Third, companies commonly make the mistake of negotiating support agreements at unfavorable times. The best time to negotiate your support agreement is during a big purchase or renewal.

3. SaaS overcommitment. Gartner predicted that software-as-a-service revenues would grow to at least $8.5 billion in 2010. The numbers are still coming in, but with vendor tactics such as minimum purchase clauses, Gartner?s estimate seems likely. Vendors often mandate the purchase of a minimum number of licenses over the contract term, so, if you downsize your operations, you will overpay. Get rid of the minimum-purchase clause in your SaaS contracts pronto.

4. Poor wireless cost management. In 2010, many companies made the same mistakes in their wireless spending that they?ve been making for years. For starters, many paid consumer rates for business usage, overpaid grossly for overage charges and failed to pool minutes. Many also failed to negotiate for incentives that would kick in if they grew their usage over the course of the contract. Finally, most enterprises missed a critical step in wireless expense management: conducting monthly audits to align usage with the right plan.

5. Selecting one vendor too early in the contracting process. It?s alarming that, in a time of tight budgets, some companies still failed to execute IT purchasing best practices. One of these practices involves knowing when it?s the right time in the purchasing process to narrow down to a single vendor.

If you do it too early, vendor radar will detect that there?s no competition left, which eliminates any incentive to lower prices or offer better terms. On the flip side, companies that juggle too many vendors in the negotiating process may find themselves wasting precious (and costly) internal resources.

6. Believing reseller profit margins are fair. ?My reseller is my advocate? is a sentiment that continued to siphon IT funds in 2010. While resellers can be superb technology partners, companies would be remiss if they didn?t understand their profit margins. Reseller pricing typically reflects inflated OEM pricing, as well as a reseller?s own profit margin. Companies wishing to reduce IT costs in 2011 should demand discounts from the OEM and a lesser profit margin from their resellers.

7. Letting loose lips sink ships. IT staffers have a dangerous habit of becoming too chummy with vendors. While it makes for a great partnership, it often happens at the expense of the technology budget. For any IT initiative that requires a new purchase or purchase renewals, companies should beware of giving any inside scoop to vendors.

That includes details about who else the company is courting, competitor pricing, available budget and terms. Remember that vendors try to extract valuable information not only from IT, but also from the business unit being served and from procurement. Any discrepancies in information can easily turn into less leverage at the negotiating table.

Time will tell whether 2011 will bring more stability to IT spending in the enterprise. Meanwhile, companies can learn from last year?s overspending mistakes. The savings to be had can help meet boardroom mandates to keep costs under control, while also funding new projects to drive innovation.

Gregg Spivack is director of client services at NPI, an IT spend-management consulting firm.