You get what you pay for. And sometimes, when there’s extra goods and services bundled into a contract, you get more than you bargained for – and a bigger bill to boot.
An audit by NASA’s inspector general’s office shows that the space agency overpaid by an average of 24 percent for computer peripherals, accessories and supplies purchased through a 1998 desktop services deal with a group of seven vendors. Vendors involved in the US$1.3 billion arrangement bundled products with unnecessary hardware, software or services, jacking up the prices. One supplier bundled a Palm Inc. m505 with several communications and Web-browsing programs for a total price of $1,128.93, while a basic Palm m505 would have been less than $500.
Since the audit came to light in August, NASA officials say that the agency has recovered its overpayment, has agreed to scrutinize the use of product catalogs and will seek volume discounts.
The blunder gives CIOs a chance to review some key concepts when looking to sign a deal that bundles goods and services, a common outsourcing practice. Bundling can be good business. But there are potential problems: A lack of choice means the potential for hidden costs. Some tips:
Decide whether the product you’re buying is a commodity. If it is, a lack of choice in product selection is not important, says Michael Murphy, a partner with law firm Shaw Pittman. If it’s not, CIOs should negotiate rights to OK outsourcers’ product choices.
Know that bundling can be forever. If you agree to the bundling of certain service levels into the price of a product, you must buy that service every time you buy the product, whether you need it or not. In such cases, CIOs can negotiate “a menu of service-level options to give internal customers some choice,” Murphy advises.
Make fair product prices part of the contract. Build competitive bid provisions into the contract so that vendors selling you commodity products are getting good deals from their suppliers.
Renegotiate if necessary. If a contract is not working out well, use the situation as an opportunity to re-examine the entire outsourcing relationship, not just bundling. William Bierce, a principal at law firm Bierce & Kenerson, says, “A properly crafted agreement can provide both flexibility and control for the customer without jeopardizing the service provider’s ability to deliver agreed service levels.”