It’s a now well-known axiom that there is opportunity in chaos. From our vantage point, technology suppliers are joining in the spirit of that theme to accelerate price increases which are then passed along to their customers. Price gouging it would seem is no longer the domain of consumer goods as we suspect it’s also being employed in high tech. If you have been involved recently in a renewal, software audit, M&A activity, or any other supplier intensive negotiation, some of these price increase ‘excuses’ may sound familiar:
- Energy costs
- Interest rates
- Labor supply
- Economic downturn
- War in Ukraine
- Rising US dollar value
- CPI/Innovation Index
- We’ve just been sued by SEC for fraud/bribing…again (maybe that’s just Oracle)
The list could go on but serves as a theme for excuses on why your discounts are being slashed and prices are going up. But this begs the question, are these legitimate cost increases that should be passed along to you? Or is this an easy way for some of the world’s largest, most profitable companies to pad their margins even further and max out executive bonuses?
According to a Bloomberg article titled: US Corporate Profits Soar With Margins at Widest Since 1950, companies overall are increasing prices at a level far above added costs incurred by production and labor. Said another way, under the cover of ‘passing along inflation costs to customers’, they are padding that by a pretty good margin to rake it in and use the aforementioned bulleted items as the reason(s) why. For some context, the S&P 500 blended net profit margin as of Q2 2022 was between 12% and 13%. However, as a sector, Information Technology averages 24%. Microsoft’s net profit margin as of June 2022 was 36%.
Taking a careful view of each supplier sector/industry you are dealing with is a key component to understanding the supplier justification for using inflationary or other excuses to gouge. Looking at the Stern School of Business chart by sector, you would see that ‘Computer Services’ has a net margin of 3.42%. Conversely, the sector titled Software (Systems and Applications) does much better coming in at 19.6%. We also know that within the software sector, the largest players do far better than their sector average. So, when a market dominant software company tells you discounts will be slashed by 30% to 50% due to <insert excuse>, it might be time to do a little research to validate the claim.
While we would never begrudge a supplier from maximizing profit potential, exceeding investor expectations, and padding bonuses – we would question at who’s expense? Certainly not NET(net) Clients. For those situations where price increases might be justified (although we might argue never), it warrants a review to thoroughly understand what a reasonable and contractual obligation should look like. Even when currency valuation may be impacting costs, there are often ways to navigate these issues, but only if you investigate options.
When faced with a surprise increase from suppliers using ‘market excuses’, we recommend digging into each supplier’s:
- Profit and expense margins
- Historical pricing
- Existing contractual obligations
After some research, you may start to see where the lines of reason exist (or don’t) within your suppliers' rationale for ruining your budget.
In summary, cast a wary eye toward any excuses being made by suppliers to pass off more cost to you. Based on our direct experience of late, it's clear many firms in the tech sector are using these excuses to drive favorable terms for themselves at customer’s expense. This is really not a new concept of course, as we already know most firms overpay technology suppliers by an average of 33% or more. However, in the cases where suppliers are using the chaotic market forces as cover to gouge customers, represents a new low that should not be tolerated.
Founded in 2002, NET(net) is the world’s leading IT Investment Optimization firm, helping clients find, get and keep more economic and strategic value. With over 2,500 clients around the world in nearly all industries and geographies, and with the experience of over 25,000 field engagements with over 250 technology suppliers in XaaS, Cloud, Hardware, Software, Services, Healthcare, Outsourcing, Infrastructure, Telecommunications, and other areas of IT spend, resulting in incremental client captured value in excess of $250 billion since 2002. NET(net) has the expertise you need, the experience you want, and the performance you demand. Contact us today at email@example.com, visit us online at www.netnetweb.com, or call us at +1-866-2-NET-net to see if we can help you capture more value in your IT investments, agreements, and relationships.
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