When I first started in my position as IT Manager we were deploying IBM Pentium computers at $1600 a machine. We were also paying $340 per machine to extend the parts and labour warranty on the machine from 3 years to 5. I did not realise it at the time but this was my first experience with the cost of risk. When I asked the supplier of the warranty why it was so much I got two reasons: we have to stock enough parts to fix all the machines of that specific type for the length of the warranty for all our customers and we don’t know how much we will need. The other reason given was they did not know how many times they would have to repair the machines in the time period contemplated. We started to push back on this as we had data on repairs from a previous model from the same manufacturer and I was able to get the price down to $170.
From 2009 to 2015 we tried a different way to manage our extended warranties on computer hardware. Instead of a parts and labour warranty, we contracted for a labour only warranty. We forecast the hardware we would purchase over a six year period and worked with our service provider to come up with a per machine price that would cover the cost of a dedicated technician. We continued to purchase parts on an as needed basis from the supplier but would price check regularly and order from other suppliers when necessary. This model took all the risk of our warranty from the supplier and moved it to the school board. It was the least amount we had ever paid for warranty and when all the repair costs were accounted for, was most economical. On the downside, this model took all the advantage of working with a service provider out of the equation. The supplier was not incentivised to add more staff to our work during busy times, nor could they take our dedicated support person for other work during slow times. We also did not benefit from the overlap with dozens of their other customers. While we were paying much less, service and support suffered and my staff were tiring of having to manage the ordering and inventory of parts.
We have gone back to a more traditional model for extended warranties now but we have the experience of the last fifteen years to guide us. We now look at managing risk as a shared responsibility and have open and honest discussions about factors that are affecting costs and how we might address them. Some people on the purchasing end of this arrangement might question this approach. However, I have learned from experience with our computer warranties that I need a partner to help my organisation with the service and repair of over 5000 computers; it doesn’t benefit either organisation if that company loses money on our agreement. If they trust me on that basic premise, that alone brings their cost of risk down and they can price more aggressively. I also have mechanisms at my disposal to, as Ronald Reagan would say: trust…but verify.
A final thought on risk. I recently had a vendor provide a quote for software licenses. These are licenses I buy regularly throughout the year, usually 10-12 at a time and typically 600-700 a year. The quote I received was the list price in Canadian dollars. I said, “Frank…come on!” Frank explained that if they were going to honor the price for the year they had to protect themselves from the rise and fall of the US dollar against the Canadian dollar. Here is another example of where working closely with a supplier (and having a trusting relationship) can help. For large orders I call them up and we calculate the price on the spot, full transparency. For small orders we leave it at list so they do not get burned. Some of our Canadian suppliers deal in US dollars for this reason. We have also worked with our close vendors in the past to “time” deals according to the dollar. Some school boards are timing their fuel purchases to correspond with market pricing, it makes me wonder if school boards could hold some of their cash in US currency to allow our suppliers to remove currency fluctuation from their list of risks.
Most people might assume that suppliers are about maximising profit, and some are. However, through experience, I have learned that by partnering and building trust with key suppliers we can guarantee them a modest profit, which, in the long term, is better for them and better for us. If I can help them reduce their risk, they pass this along in reduced cost.