Deep discounts

Scott Renner was in for a pleasant surprise when he began shopping for network hardware early this year. His employer, $18.4 billion Allfirst Financial, needed to upgrade to 100M bit/sec Ethernet at its 300 bank branches and regional offices. Replacing all the Cisco routers, switches and hubs along with most wiring would cost millions of dollars.

But whereas Allfirst had received a 28% discount off list price on Cisco gear in 2000, this time the savings were much greater. Renner, Allfirst's vice president of data network engineering, negotiated a 35% discount. And that wasn't even counting trade-in discounts. All told, the savings added up to nearly 50%, and Allfirst ended up spending $1.5 million instead of $3 million on the equipment.

"Discounts have gotten much better since last year," says Renner at Allfirst headquarters in Baltimore.

Discounts have indeed improved. In the past, the best discount you could expect to receive on Cisco gear was under 30%. Responding to competition, big network vendors such as Cisco, Enterasys Networks and Juniper Networks have steadily increased their discounts over the past several years. Many offer trade-in, competitive and educational programs that make the discounts even higher.

"Traditionally, it was the more you bought, the bigger the discount. That's no longer true at all," says Mark Fabbi, vice president and research director of networks for Gartner. In fact, smaller, aggressive companies are getting much better discounts than Fortune 500 counterparts because of their willingness to bargain and pit vendors against each other. Fabbi says the largest companies are overpaying at least $500,000 per year for infrastructure equipment.

Many large companies negotiated a good discount - say, 30% - with Cisco or another vendor a year or two ago. But then they make the mistake of letting that discount stand year to year, while others are still haggling and getting better deals. "Large companies tend to get locked into their vendors," Fabbi says. The trick is reopening negotiations on existing discounts every time you sit down with a vendor.

For example, if in the past you received a 30% discount on Cisco routers and switches, see if you can't argue your way to a deeper discount for all your Cisco gear if you're considering buying Cisco's voice-over-IP products.

"Cisco does a great job of recognizing when you're locked in. Their strategy is to increase over time the footprint they have at a customer. They always have something new to sell you," Fabbi says. Use this as an opportunity to put the proposed new project out for competitive bids. It takes work, but no one ever got great discounts by blindly sticking with one vendor.

Another rule of thumb: Use the channel. Even if you are locked into one vendor (excellent service and a long-term partnership can be good reasons for this), cultivate relationships - and competition - among network resellers. Going through the vendor directly will result in higher prices.

Encouraging competition among resellers was one strategy Renner used. "Before, the negotiation was through different vendors of different equipment. Now the negotiation is the same equipment, just different [resellers]," he says. Allfirst ended up choosing Skyline Computer of Campbell, Calif., as its primary reseller.

Another approach, if you standardized on one vendor, is to make vendors compete against the used-equipment option. Rick Parkinson, vice president at retail exchange GlobalNetXchange, plans to use this strategy when he begins actively looking to upgrade some Cisco hardware. "We're looking at the used market. The pricing is attractive and it gives us leverage against the vendor," says Parkinson at corporate headquarters in San Francisco.

As good as overall deals have been for customers, one specific type of discount is disappearing. Cisco recently discontinued its competitive migration program. "Cisco is getting squeezed. Margins have decreased. They're eliminating incentives where they didn't need them," Fabbi says.

Renner has watched as Cisco's discounts for trade-ins eroded for existing customers. "Before, we could get a trade-in of $30 to $40 per hub. Now it's more like $3 to $4. It's not worth it to for us to box this stuff up and send it in," he says.

Still, as a customer who usually spends several million dollars per year with Cisco, Renner is optimistic that discounts will remain high. Says Renner, "I don't think the discounts are going to be affected in the near term."

Paul is a freelance writer in Waban, Mass. She can be reached at laurenpaul@mediaone.net.

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