Your discount may vary

by Paul Desmond

From...

February 23, 2000
Web posted at: 8:22 a.m. EST (1322 GMT)

(IDG) -- If you're not getting a discount of 40% or better on network equipment and data services, you may be losing out to your competitors.

A survey of Network World readers shows customer discounts vary dramatically, from nearly zero to more than 40% off list price. While it's true the majority of discounts are somewhere in the middle, the survey nonetheless indicates that many people could be getting a better deal.

One of the main reasons more network executives don't fare better in contract negotiations is because they're at a distinct disadvantage to the vendor or carrier they're negotiating with, no matter which company that may be.

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"It's like the movie 'Groundhog Day' with Bill Murray, where the same day is repeated over and over," says Brett Machtig, an executive vice president at Telwares, a telecom procurement and negotiation services firm in Destin, Fla. "These vendors do the same negotiation a thousand times, each time improving."

Improving your own situation involves making the most of the leverage you have, which may be more than you think, and following sound negotiating principles.

Equipment breakdown

On the network equipment side, more than two-thirds of respondents are lumped in the middle discount categories, which range from 5% to 35%. The largest chunk - 27% - is in the 15% to 29% discount range. That leaves a significant number of companies at either end of the spectrum, with 25% receiving discounts of 9% or less, and 13% of respondents getting discounts of 40% or more.

While the number of respondents did not permit a breakdown by vendor, half the respondents did identify themselves as Cisco customers, enough to make for a statistically valid breakout of Cisco users. But the Cisco-only results are not dramatically different from the group of equipment vendors as a whole, or even vs. all Cisco competitors combined (see graphic).

That may seem to fly in the face of oft-heard comments that users pay a premium for Cisco gear. But if Cisco prices are higher to begin with, then a discount that's in line with others in the industry will still result in a higher net price.

"I still believe there's a premium associated with buying Cisco, although there are instances, depending on who the competitive focus is at the time or depending on the nature of the account, where that's not true," says Joseph Baylock, a vice president at the consultancy Gartner Group and a longtime Cisco-watcher.

Enterprise users who receive discounts of 40% or more from Cisco are doing well. "That's rare in our experience," Baylock says, noting that discounts of that size go mainly to service providers.

Across all equipment providers, there is a definite correlation between company size and discount size. Almost 90% of companies with fewer than 2,500 employees get a discount of less than 30%.

Conversely, 60% of companies with 10,000 or more employees get discounts of 30% or more. At the same time, only 42% of companies that spend $10 million or more each year on equipment got discounts of 30% or better, which suggests that being a big company is more likely to get you a larger discount than spending a lot of money.

That makes sense to Baylock. A large company may have up or down years in terms of equipment expenditures, but over the long haul you can generally make the case that a company with 10,000 employees will consume twice as many LAN ports, phones and so on as one with 5,000 employees. Vendors know that and will respond in kind when it's time to talk figures.

Data services discounts

Like the equipment providers, most carriers are lumped in the middle tier when it comes to discounts, according our survey results. Three-quarters of all respondents said they receive price breaks in the 5% to 34% range.

There are, however, some notable exceptions. (For a breakdown of carrier discounts, go online to www. nwfusion.com, DocFinder: 6931.) US West is the stingiest carrier, with 50% of its users reporting discounts of 4% or less and none receiving a discount of 30% or greater. BellSouth is second stingiest, with its users split in even thirds among the 0% to 4%, 5% to 14% and 15% to 34% ranges. No BellSouth user got a discount of 35% or greater, but that holds true for all other regional Bell operating companies as well.

The number of respondents did not permit a breakdown of GTE or SBC discounts, which are grouped together in the "other" category. The most generous carrier in the survey is Sprint, with 16% of users reporting discounts of 35% or greater. AT&T is a close second, with 15% in that range. But 16% of Sprint users are also in the 4% or less category, while only 10% of AT&T users receive discounts that low.

Those Sprint policies may not last much longer, given that the company about to acquire it, MCI WorldCom, usually doesn't play favorites: 94% of its users report they get discounts in the 5% to 35% range, with 41% at the 5% to 14% level and 53% at 15% to 35%. The remaining 6% get discounts of 35% or greater.

On the data services side there is a correlation between company size and discount size, but it's not as pronounced as in the network equipment results. For example, 88% of data service users with fewer than 500 employees get a discount of less than 30%, while 65% of those with more than 10,000 employees are at that level.

Differing views on single-sourcing

There is also a pronounced difference between data services and equipment when it comes to single-sourcing, which is the idea of getting all equipment or services from a single supplier.

On the equipment side, larger companies are considerably more likely to single-source than smaller firms: 62% of companies with 5,000 or more employees say they do, while the figure is 60% for companies with 500 to 4,999 employees and 46% for smaller firms.

But the practice apparently isn't working out so well for smaller companies, as 67% of them say they don't plan to continue single-sourcing. Larger companies overwhelmingly do like it - 73% of those in the 500 to 4,999-employee range and 87% of the largest companies plan to continue single-sourcing.

Data service users have views that are almost the polar opposite of equipment survey respondents when it comes to single-sourcing. Those at smaller companies are far more likely to single-source - 79% of those at companies with fewer than 500 employees - than those at larger companies (67% for midsize firms and roughly half at the largest companies). At least three quarters of users in all categories who are single-sourcing plan to continue doing it.

Baylock confirms that Gartner sees the single-source trend growing among data equipment buyers at large companies. Lower cost is a contributing factor, he says, but the trend also has to do with companies moving toward policy-based networking, which works better in a single-vendor environment.

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