5 Reasons Why a Growing Company Overspends on IT
Feb 06, 2023
When I was younger and starting out in my IT career, I was always frustrated by the penny pinching nature of people. Of course, I did not understand how hard it was to make money then. People paid me for a service, and that was that. I worked with and for companies that produced a product or a service. The CEO / CFO / COO always had to dive into the costs behind things. For the IT person with starts in their eyes, that was frustrating.
This has not changed. Young, excited IT people are asking business owners for more money. They do not understand that the business owners are not that excited about the tech world. Sure they love to think about innovation too, but not to the point of throwing money at it. A business is not a place to experiment, or to create the perfect mouse trap. Try as you will, but these parties will rarely understand each other.
It is this climate that we walk into when we are talking to companies in growth stage. I have noticed that the company that gets to above 50 employees and / or 10M in revenue. This is the time when expenses seem to increase. This is usually exponential. New IT expenses seems to come from everywhere and requests come in almost daily for new hires. New contracts, new equipment purchaes, more infrastructure. The reasons for this are understandable. The operation is scaling, and a certain number of people, devices, and systems that can handled. Once that number becomes reality, the new expenses start pouring in.
Every business owner or C level person that I have consulted with over the years faces this. This happens again. At various stages of company growth this tipping point of IT scale happens. The company then reacts, or worse does nothing. Ignored for too long and the escalating issues and costs will bury any operation. I have seen this happen many times, and everyone questioning why they did not see this coming.
When this scale point happens, executives become suspicious. They believe that these costs are too much. They suspect that the expenses are not managed well. They are right. The suspicion is almost always accurate. Why?
That is the point of this message. The IT operation was not prepared to scale, that is true. More investment in IT required. True. What is also true is that the existing team is not prepared to handle the negotiation of the next round of costs. Here in lies the problem. The IT team that got you to this point, now has to go negotiate the purchases for the next version of the company..
Here is an absolute fact. When this happens the company ends up overpaying for IT products and services.
In the lifecycle of a company, if the company survives, this trend continues to happen. 10M, 50M, 100M, 200M, 500M in revenue and each time the scale point causes a new round of IT purchasing. Each time the previous team is out negotiated. Each time the inexperience of the IT team ends up paying more than they should.
This is why when a company hits a certain size they start hiring and investing in IT procurement. They invest in specialty software. Contract management software. Software lifecycle software. They hire sourcing managers. Procurement managers. Buying teams. The money being overspent in IT becomes so significant that this is justifiable.
Pricing Tiers
The IT industry has built a channel around this phenomena. They have different teams, pricing strategies and offers for tiers. They will put companies in category based on the expected procurement patterns. This makes sense, but the executive team at a growing company needs to understand. If they do not transition themselves to the right tier at the right time, they will be paying too much. Far too much. I have seen Company A getting a 30% of list discount, while a Company B is getting 70% discount. There are no rules here. It is whatever the industry can get away with. And they do, to your disadvantage.
This is the most important message of this blog. Your current IT team is not capable, prepared or armed to negotiate at the next tier. The partners / oems / publishers / services vendors will resist. We are not describing a simple resistance. Everything is setup this way. Compensation plans, bonus structures, special incentives, budgets. Everything. You are fighting an entire ecosystem designed to make sure you keep paying what you are now.
IT Products
As your company grows you start buying a new series of IT products. This is a constant drain on expenses. Software partners are always telling you that you have to upgrade. They tell you that to improve performance you need new infrastructure. Better networks. Faster storage. More cloud subscription costs. You move up a tier, you buy more. As this shifts, you need to start negotiating at a new level. Sometimes you will get lucky and you have an IT team that are savvy on this and can get some pricing concession. Good, but not good enough. I have not found a company yet, that has grown from 50 to 200 employees and been able to keep from overspending. The system is completely stacked against you. Unless you have the ability to negotiate in the correct manner and with the right set of tools, you will overpay. A lot.
IT Software
Software contracts and expenses are a treasure trove of cost increases. You have a primary set of software that runs your business. Your ERP, software that runs your production, etc. That is not what I am referring to. When you company gets to more than 50 employees you start to need other software. Software that you were not expecting. Office 365 and related tools becomes a big part of your budget. Adobe or similar software subscriptions. Anti-virus. Communication software, and it is never one. There are always 5 or more contracts involved in any employee unified communication. Identity management. File systems. Backups. Compliance. The topic areas are endless. Your IT staff, vendors and partners will become experts and trusted advisors. They will explain to you problems that you never thought that you had. Problems that only money and docu-sign contracts will solve. Unarmed and unprepared for these negotiations is a recipe for oversubscription and bloat.
Maintenance
We have all been to Best Buy and we have all said "no, thanks" to the offer of a protection contract. I do not want to pay 20% more to protect my product, thanks. Yet, as we grow into the next tier in IT spend we say yes to this same thing all the time. The entire industry makes most of of their money on maintenance, warranty, and support. They are clever in this regard. They will bury software entitlement into the same contract for hardware replacement. They have all become like Tesla in their thinking. The money is not going to be at point of sale. They money will be had on feature upgrades. That is pure profit. There was a time when the rule of thumb was that 20% of your IT purchases would be for maintenance and warranty. This has changed. It is often much higher. There are hundreds of ways you get charged more for this. They will make overpaying sound attractive, so attractive, you will be willing. You will think that 4 hour, 24X7 coverage is necessary. You will think that guaranteed upgrade, or perpetual license is necessary. You will think buying "all you can eat" is a good idea. When you move up in IT spends, the tricks get more eloquent. The reason why is that larger enterprises compress spend. So the IT companies have to get real creative. They love it when a smaller company becomes big. They then get to charge you more for the hardware. More for the software and you fall for all their tricks.
Labor
The n+1 fallacy gets us every time. As you grow, you become convinced of the workload of a person. Your IT people will always be trying to convince you of this fact. They will give you ratios of the number of people required to support X number of machines. Or Y number of people. If you decide to replace your old IT crew with an company that you outsource too, the same negotiation. Except now you have a contractor with sophisticated tools to prove it. The best example of this is in help desk.
When the company first started to grow, the IT support problem was handles by a dude. Ok. Dude or Dudette. Yet, almost always it is the nephew of a friend that is the person you put in place to handle the day to day problems. This works until things get bigger and before you know it, you are building a IT help desk. That requires infrastructure, people, and software. Training, recruitment, and a ticketing system. This is a cost that no one thought about for this type of business. Yet here it is, spending a bunch of cash to make sure your people have someone they can call. You will need to outsource this. You are not capable of scaling this practice. When you do, you will be negotiating from the wrong position. Get ready to pay. More dude math.
These are 5 of the reasons why a growing company spends way too much on IT. There are many more. This is why we have built a purpose built platform to help companies find savings in Information Technology purchases, contract negotiations and help desk. We have years of experience compressing IT costs for large enterprises, and we have created a way to pass those savings on to you. You can scale your business without suffering from exploding IT costs. You just need some help from the right people!
The ingenewit.io platform can help save you money with not upfront costs. Get our team in place to give you superior negotiating power!
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