Too many companies spend more than they should -- or want -- on hardware and maintenance during the server refresh lifecycle. One of the main reasons for this is they are unprepared for the sales strategies that server vendors use.
"They're [the server vendors] doing it by playing a transactional game," according to ClearEdge Partners analyst Atish Patel. "This transactional game really revolves around the five stages of a server lifecycle. And in each of these stages, suppliers are doing or implementing different strategies to improve their leverage position."
We presented those five stages, as described by Patel and colleague Danilo Milevsky in the webinar Moments of Truth in the Server Lifecycle, in the first article of this series. That article also outlined the "ingrained sales tactics" used by server vendors. Now, it is time see how server vendors implement those sales strategies using real-world examples and provide advice from the analysts on how to circumvent those tactics.
The point of the examples is to help readers understand, as Milevsky said during the webinar, that those sales pitches are often "just scare tactics that [server suppliers] use to get to accomplish what they want, which is you spend more money at their timeline." Suppliers craft their pitches "to improve their leverage position or generate as much revenue as possible," he said, and take back market share that name-brand server vendors have lost to white box server suppliers in recent years.
Net new purchase: 'Hey, we have a great deal on a bundle'
At the "net new purchase" stage, "Something you might see a sales rep from one of the suppliers say … is, 'Hey, we have a bundle for you,'" Patel said. "'It expires this month, but don't worry: We can get you $40,000 off the top of this deal.'"
Atish PatelAnalyst, ClearEdge Partners
The strategy here is the bundle, which is "all good on its face," he noted. But this bundling tactic can be problematic when the offer is opaque. "They won't share the list price. They won't share any SKUs. And you won't have any information as to the line-item discounts of each of the items you're buying," Patel explained.
He cited the example of a Cisco unified computing system offer with some B200 server hardware, workload optimization software and three years of support at a $40,000 discount. However, because it is a bundle offer, you wouldn't really know how much each component part is worth. At renewal time, "it becomes more difficult to pull this deal apart and maybe bid out certain sections of this deal and improve your position moving forward," Patel said. "So, it kind of just ties you into a difficult position."
The key here is to avoid bundle deals without line items. Request the discounts provided for each component part be clearly spelled out.
Optimum performance: 'I have a great opportunity to share with you'
In this scenario, you receive a sales pitch, even though your servers are fairly new and should be at peak performance. "You know you don't need to upgrade them, or you don't need to refresh them because you literally just bought them six or 12 months ago," Milevsky said.
However, the unexpected sales pitch arrives, he said: "'I have a great opportunity to share with you. We can refresh your hardware with the latest and greatest while reducing your run rate by $90K. It's a no-brainer!'"
Because you don't need or expect an upgrade, the sales pitch uses "a few clever tactics in the background," Milevsky explained. It is a rogue offer that comes out of the blue with a side-by-side comparison of your current run rate and a new, optimized run rate in an attempt to make it seem like a really good deal. In this example, he said, the offer also included maintenance -- with an inflated hardware price to make up the difference -- and an emphasis on total savings.
A ClearEdge client who received this offer had a current run rate of $675,000, if they kept running maintenance on its existing IBM Power7 servers. As part of the offer with the $90,000 in run rate savings, the sales representative pitched an upgrade to new IBM Power9 servers with three years of maintenance included and a small discount on the hardware for a total of $975,000.
A good deal, but could they do better? An analysis of what the cost of those servers would be from competitors revealed the actual competitive market price for those same Power9 machines as somewhere between $475,000 and $555,000.
This meant the IBM offer, as is, left in the neighborhood of $200,000 of savings on the table due to "the clever way that the sales rep framed the deal," Milevsky said. "Those are the types of things that are happening in that ['optimum performance'] stage -- when you're not worried about refreshing your hardware, but it seems like such a good deal that you do it anyways and you spend $200,000 more than you should have."
End of OEM warranty: 'Your renewal is attached, want a discount?'
Unlike stage two's blind offer, the "end of OEM warranty" stage is a natural point for you to hear from a sales representative.
Decisions to make at this stage may include what do with your servers, and whether to keep or extend maintenance, add extra services or go with a third-party for maintenance. As an example, Milevsky said you might receive a pitch like this: "'Your $1.8 million renewal is attached. We can provide 1% discount for prepayment and 2% for a multiyear contract.'"
He called this a classic defense strategy to get customers on the hook for a few more years. The problem for customers is server vendors typically only give 30 days or fewer to decide, which is "not enough time to prepare, analyze the proposal and come up with a counter proposal," he said. "They're going to give you maybe 15 days, 20 days and say, 'Hey, can you sign this already? We'll give you an extra five points off if you want to, if you sign up by next week.'"
It is a high-pressure situation, compounded by long and detailed quotes that are often so complex that they're difficult, if not impossible, to understand -- especially, in a short period of time. Furthermore, the discounts offered on maintenance renewals are usually small, as they don't want you to know there is some wiggle room to negotiate.
Milevsky cited a Hewlett Packard Enterprise (HPE) maintenance renewal where a client received a quote on Dec. 28 for coverage starting on Jan. 1. This gave the client a mere two days to perform an analysis and price comparison on the offer or explore other deal options.
"That's a classic example of what they try to do," he said. "They try to get to you to sign quickly [and] rush the purchase so that you don't even look at the price you're paying."
The five stages of the server lifecycle
The first stage of the server refresh and renewal lifecycle, net new purchase, is simply when it is time to buy new server hardware. That's followed by optimum performance, when servers are still fairly new, and end of OEM warranty, when the end of a service agreement is approaching. The fourth stage, device becomes legacy, is when server hardware is starting to age and the maintenance agreement is coming to an end, while the fifth and last stage, end of life, occurs around when the server's lifecycle is coming to an end -- along with any kind of support from the supplier.
Device becomes legacy: 'Don't miss out on this bundle when you upgrade'
At the "device becomes legacy" stage, you are in the fourth or fifth year of a maintenance renewal and your servers are starting to become legacy. This is similar to the "optimum performance" stage, except it is a more opportune and natural time to receive a sales pitch.
Milevsky cited an offer along these lines that a client received from IBM: "'Your $2.4 million renewal is attached at 13% off. But, hey, by the way, I've also attached an option for a bundle for new V9000 storage blocks and Power8 servers in case you want to upgrade.'"
To suss out the quality of the offer, analysts first evaluated the competitiveness of the 13% maintenance discount, determining a 20% to 30% discount more in line with this type of spending. Then they researched what third-party maintenance providers would offer for the same bill of materials. Before those quotes arrived back, IBM came back to the client with a much better deal, revising the maintenance discount to 55% simply due to the threat of losing the business.
Next, analysts assessed the upgrade option, immediately cutting out the V9000 component, as the client didn't need another storage block. The client needed new servers, however, so the analysts had go back to IBM to see what kind of deal IBM would give on the Power8 servers. IBM returned with a 25% discount, which was OK but not great, according to Milevsky. The client then told IBM they went back to their tech team, which said it didn't really need the server upgrade after all. The client would be fine for another year or two with their current server boxes.
"Lo and behold, they [IBM] came back and said, 'OK, well, we can't really give you a better discount on the P8 servers, but we can reduce the maintenance a little bit more,'" Milevsky said. "That's typical, because they're making net new dollars on the net new hardware, so they'll be more flexible with you on the maintenance so that they can make more commission on those net new machines."
The client ended up back at the $2.4 million total of the original offer, but now with brand-new servers and much more value, he said, all due to "running that third-party exercise and an effective messaging plan with the sales reps."
End of life: 'Are you free to discuss refresh options?'
At this stage, the end of your server equipment's lifecycle is fast approaching, along with any kind of support. For your server supplier, this is an opportune time to send a server refresh message, Milevsky said: "'Friendly reminder that you're ProLiant DL360s are going end-of-service life on 9/30/20. Are you free this week to discuss your options to refresh?'"
Here, the vendor uses the end of something -- service life in this case -- as a sales tactic. And since server suppliers typically time ends of quarters and fiscal years to end of service life -- about three months ahead -- those timeframes matter, too, because it is in the vendor's interest to get you to purchase product just before the end of a fiscal year or quarter to realize earnings.
The server supplier is once "again using some type of date that's coming up quickly and forcing an upgrade, forcing you to make a decision, forcing you spend more money," he explained.
There's always room to negotiate and time to explore your options. Don't let your server vendor's timeline or earning pressures push you to do something not in your organization's interest.
Shadow IT: How about some maintenance with those servers?
While many enterprises outsource server maintenance, server suppliers may make an offer to provide these services, as well. This gives them a view into your environment that Milevsky called "shadow IT," which he said plays a role throughout the five stages of the server refresh and renewal lifecycle but is especially relevant during the fifth stage.
He noted how HPE provides great services in this area. As an example, say HPE offers to provide a server customer with a maintenance contract that includes proactive care, full data center care, an assigned account team and the HPE OneView DashBoard to monitor server performance for $1.3 million annually. This seems like an exceptional deal because it's an easy forecast and all maintenance is outsourced to HPE.
But is outsourcing all of this to your server supplier really such a great deal, even if the price seems right? Not necessarily, Milevsky said, as it gives the supplier "an access point to what's going on in your environment, so they can offer you better deals and they can offer you refreshes when they see an end-of-service life date or when they want to push more revenue from you."
"Really your $1.3 million annual spend in HPE data center care ends up being tagged on another $600k every year for a hardware refresh that you weren't expecting that they're pushing because they control the timeline," he added.
To help organizations be ready for these server refresh and renewal sales pitches, Patel and Milevsky outlined forecasting strategies and described what they called a buyer's playbook. Those work hand in hand to better prepare enterprises for when negotiating time come along. We will cover those next.
About ClearEdge Partners
Founded by senior sales executives from large IT suppliers and informed by current market analytics, ClearEdge enables CIOs and their teams to make more competitive IT investments. By combining rigorous inspection and IT financial expertise, they identify risk and opportunity, align internal teams, and maintain leverage throughout the lifecycle of supplier relationships. As a result, their clients maximize the value of their investments by unlocking millions of dollars from legacy spending and redirecting funds toward IT modernization, digital and cloud transformation with confidence and speed.