How to get the best deal

Take this crash course in bargaining for storage. Get the lowdown on effective tactics such as resisting vendor lock-in, working with multiple vendors and leveraging the second tier.

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Storage gear is a buyer's market, but that doesn't mean every buyer is getting a great--or even a fair--price. According to Gartner Inc., the difference between disk subsystem vendor bids can be as much as 300% for comparable products. At the same time, the increased importance of software in the pricing equation, combined with new pricing models and metrics such as price per managed port, make it difficult to ascertain what even constitutes...

a good price.

"Hardware prices are always coming down, so the real action is with the software," says Michael Rogers, director of storage administration, TSYS Inc., a credit card processor based in Columbus, GA. This is where buyers will win or lose the pricing battle, while the basic hardware increasingly becomes a commodity.

Checklist for better storage purchasing
Here's eight things you need to know before you make an important storage purchase.
Identify your needs before choosing technologies.
Buy storage, not visions.
Separate storage procurement from server procurement.
Negotiate pricing for future capacity or feature/function upgrades that include quarterly pricing adjustments.
Check hardware and software maintenance prices and free periods.
Pay attention to software/features prices.
Buy only what you need.
Try to negotiate three-year warranties.

Source: Gartner Inc.

Although there's no magic formula, there are proven ways to get the best price on storage. The key is to resist proprietary vendor features, do business with multiple vendors and know what you must have for storage well in advance so purchases are timed appropriately. And for whatever price under negotiation, understand the true TCO. The lowest acquisition price isn't necessarily the best deal in the long term.

In a recent report titled "How to Get More for Less in Storage Procurement," Josh Krischer, vice president and research director for enterprise servers and storage at Gartner, offers tips on how storage managers can get the best price. In the report, Krischer lays down the fundamentals of negotiating with storage vendors (see "Checklist for better storage purchasing," on this page).

For example, Krischer identifies the propensity of IT organizations to overprovision their storage as a sure way of paying too much. "Do not buy excess capacity," he advises in the report, adding that "buying excess capacity inflates costs and causes faster capacity growth." (For additional information, see "Time to get organized," in the February 2004 issue of Storage.)

Play hardball with vendor negotiation
Anybody can play hardball and negotiate the best price for an individual piece of storage equipment. However, you don't necessarily gain much in terms of the overall cost of your storage infrastructure. To negotiate the best storage prices consistently and effectively, it's important to write an enterprise storage plan.

"Most enterprises aren't just buying storage just once a year," says Randy Kerns, senior analyst, The Evaluator Group, Greenwood Village, CO. Storage infrastructures are refreshed at least twice a year as companies buy and retire storage. This pattern must be part of the storage negotiation process.

"You need to have a buying cycle and a plan that identifies storage turnover and growth," Kerns says. Try to buy when the vendor is closing out a quarter or a financial year. In particular, publicly held storage companies are very susceptible to negotiating pressure as the financial quarter or year closes--a point when they are scrambling to post attractive sales figures.

The enterprise storage plan also allows the company to use the warranty period to maximum advantage. Storage vendors are increasingly offering three-year hardware warranties. After the warranty, the customer pays the annual maintenance fee, usually 15% to 18% of the acquisition cost. "It's best to acquire and retire storage to coincide with the warranty," says Kerns.

"Thirty-six months of free maintenance is a common practice for enterprise storage vendors' hardware. Free maintenance for software is 12 months, but you can negotiate for more," says Krischer. After the free maintenance period, vendors typically charge 1% to 1.5% of the list price per month.

Replacing the hardware after three years is a no-brainer: With the same money or even less, you can buy better storage. It's harder to determine the optimal time to replace software, however. "You have to develop an expert practice just around storage procurement," says Kerns.

TCO concerns
The best price doesn't necessarily make the best long-term deal. The following factors can drive up your TCO.
Retraining staff
Purchasing new tools
Modifying applications
Changing business processes
Managing a complicated software license
Integrating existing storage

Source: Gartner Inc.

To lease or not to lease
The steadily improving price and performance of storage as well as the widespread adoption of three-year warranties have dramatically changed the storage leasing equation. Leasing traditionally saved money because companies ended up paying only for the value of the equipment they actually used. The difference between what they ended up paying and the full price of the product is the residual value that remains at the end of the lease. Today, the residual value of a piece of storage at the end of a typical three-year lease is effectively zero. Says Gartner's Krischer: "There is no longer any financial value in leasing."

In his report, Krischer explains: "The standard lease scheme is far from being suitable for a situation of frequent upgrades and short equipment life cycles ... This worked in an environment of 10% to 15% improvement of price and performance per year, but this no longer exists for most storage subsystems." Today, storage systems experience 40% price and performance gains per year, according to Gartner.

Still, many companies continue to lease their storage. "We realized that there is no residual value left after a three-year lease, but we didn't want to be stuck with something we'd only have to try to sell ourselves," says Michael Sink, IT operation manager at Kichler Lighting, Cleveland. The company acquired a new Clariion CX600 from EMC Corp. on a three-year lease. Sink negotiated the price based on what he felt was fair for three years worth of business value. "At the end of the lease, we're free to look at the possibility of doing new things."

TSYS also leases its storage. The company currently operates 250TB of mainframe storage, primarily from Hitachi Data Systems Inc. (HDS). "We don't worry about the residual value. We'll even do lease extensions," says Rogers. However, he makes sure the three-year warranty runs coterminus with the lease.

Even if the classic residual value-based rationale for leasing no longer applies, there may be other valid reasons to lease storage, adds Kerns, such as simply not having to spend the cash upfront.

Six smart negotiating guidelines
With your storage plan in hand and the knowledge of how your company will pay for the new gear--be it leasing or outright purchasing--the fun starts: the negotiation. Pay attention to the timing, use multiple vendors, leverage second-tier vendors, avoid vendor lock-in, negotiate software separately and take advantage of new pricing and licensing models where appropriate. There's no secret formula that works for every organization, so the following strategies should only be used as guidelines.

No. 1: Timing is important. As described earlier, some vendors--particularly public companies--are susceptible to pressure as they scramble to meet end-of-quarter and end-of-fiscal-year sales goals. Buyers who can time their purchases to hit the last week of a quarter or fiscal year may cut an unusually good deal.

However, some caveats should be noted. First, the purchase must be large enough to impact the vendor's financials, or at least the sales representative's quota. A $200,000 order isn't likely to cause even a ripple in a multibillion-dollar storage company. On the other hand, a small vendor or startup may bend over backward for an order that size.

Second, it's not easy to hit the timing on the button. Even with a multiyear storage plan, procedural delays may skew the timing. The window is small, and if for instance, approval is delayed just one week, the opportunity may be lost.

"I try to keep the vendors' fiscal calendars in mind, but you have capacity needs, so you can't always wait," says TSYS' Rogers. Still, "I've gotten my best deals from Hitachi just before March. For IBM, it's the end of the year."

Kichler Lighting purchased its new EMC system at the end of the year, which may have helped it get a good deal. "But it was just a coincidence. We had an immediate need," Sink admits.

"We're too small to play the end-of-the-quarter or end-of-the-year game," says Richard Simon, senior system administrator at Giant Killer Robots, an Academy Award-winning visual effects boutique based in San Francisco. The company recently purchased a 4TB network-attached storage (NAS) device from BlueArc Corp., San Jose, CA.

"We played off the recession--everyone was cutting their prices to sell us a box," Simon reports. After talking with EMC and Network Appliance Inc. (NetApp), the company bought the storage from BlueArc, priced considerably lower than the other two companies. Despite all the talk of an economic recovery, it seems buyers can still count on a recession hangover to drive a better deal.

Rules for negotiating a
prudent storage deal
Here's eight things you need to know before you make an important storage purchase.
Never purchase under time pressure.
Use a dual-supplier policy whenever feasible.
Don't allow a vendor to bypass the technical staff.
Align the booking time with the vendor's quarterly or yearly financial calendar.
Don't show enthusiasm.
Obtain line-item pricing.
Lean toward purchases rather than standard leases if upgrades or extensions are planned.
Don't let sales representatives get too confident.

Courtesy of Josh Krischer, Gartner Inc.

No. 2: Use multiple vendors. The 80/20 rule as it applies to storage procurement states that you should buy 80% of your storage from one vendor and 20% from another, says Kerns. As a result, the organization has two active storage vendors serving the shop. This stimulates intense competition both before and after the sale. The vendor with 20% scrambles to expand its foothold in the enterprise by cutting the price and delivering attentive, responsive, proactive service. The vendor with 80% has to respond if it wants to retain its leading position.

This sounds good in theory, but admittedly only applies to shops large enough to support two vendors' products. Without intentionally following this two-vendor rule, TSYS has storage equipment from IBM and Hitachi in its data center. Currently, Hitachi is the dominant vendor.

"We thought about something like the 80/20 rule because it keeps the vendors honest, but we didn't do it," says Sink of Kichler Lighting. The problem was the added overhead. It would require Kichler to maintain tools and skills to manage equipment from two different vendors. "This works for large companies that are going to buy multiple [storage] frames anyway."

No. 3: Leverage second-tier vendors. Many companies have procurement rules that require two or three bidders for any significant purchase, including storage. Storage managers typically invite a few of the leading vendors to bid, and this usually results in a decent price. However, if a second-tier vendor--typically a small company or a startup--is invited to bid, almost assuredly its price will undercut the best bid of the three primary bidders by 30%, according to the CEO of a second-tier storage company.

"We recently bid $300,000 on a deal EMC was about to clinch for $500,000. The buyer said the deal was ours. Then, EMC came back and matched our price," the CEO recalls. The second-tier vendor would have made money on the deal at $300,000. EMC, with its higher overhead may only break even, but it will make up for it down the road when it plays hardball with software and services pricing. The lesson: Always include a viable second-tier vendor in the bidding.

The Center for Computational Biology and Biochemistry (C2B2) at Columbia University, NY, discovered this when it put out an RFP for a few terabytes of NAS. In accordance with Columbia's rules, C2B2 solicited bids from the major players as well as BlueArc, a second-tier player. According to the rule, C2B2 must take the lowest appropriate bid. Dell, EMC and Hitachi came in two to three times higher than BlueArc, the winning bid, reports Megan Restuccia, program manager. Now she's preparing an RFP for 100TB of NAS storage and BlueArc will surely bid, putting immense pressure on the others.

The Steamship Authority, Woods Hole, MA, which provides ferry service to Nantucket and Martha's Vineyard, followed a similar strategy when it sought to replace and streamline its storage backup system. The company initially looked at the usual leading tape backup players. Then it brought in a young company, Avamar Technologies Inc., Irvine, CA, which provides a disk-based backup and replication appliance, called Axion E. Avamar badly wanted to win this sale and cut its price dramatically on 3TB of mirrored storage, says Curt Van Riper, program analyst for The Steamship Authority. The Authority bought the Avamar product and has since bought a second.

More info
Click here for a flow chart (PDF) pertaining to this article.

No. 4: Avoid vendor lock-in. Vendor lock-in undermines negotiating leverage. "Value-added features that use special APIs create the potential for lock-ins, which tie an enterprise to certain hardware and software combinations," Krischer writes in the Gartner report. Once the organization is locked into certain product combinations, it forfeits an enormous amount of negotiating power. "Special functionality should be applied on an as-needed basis and only when a TCO analysis justifies real operational savings," Krischer writes.

Lock-ins--usually in the form of software or advanced features--are widespread throughout the storage industry, says Krischer. Trying to break out of a lock-in situation will be costly, involving the retraining of operators, altering procedures and modifying applications, job control language (JCL) and scripts. This results in the consumption of critical human resources and added costs, he notes. Even disks--considered to be as much of a commoditiy as a product can be--can lead to lock-in when vendors adopt exclusive types of interfaces or integrated disk.

No. 5: Negotiate software separately. With hardware becoming increasingly commoditized, vendors are turning to their software not only for lock-in, but to provide the fat profit margins no longer available from hardware. "Software, which only a few years ago was an incidental, can now account for up to one-third to one-half of a storage proposal, and in rare situations, even more," Krischer writes. Further complicating matters, the software isn't even loadable software as much as it is microcode that can't readily be sourced separately.

Ideally, storage managers want to itemize the vendor's proposal and negotiate the hardware and software separately. From a practical standpoint, this will be difficult. "Vendors are now selling the software with the hardware as a packaged solution," says The Evaluator Group's Kerns.

There may be more opportunities to negotiate over the length of software warranties--sometimes as short as 90 days--and maintenance agreements. "A strong buyer can negotiate for 12, or even 36 months of free software maintenance," adds Krischer.

TSYS' Rogers found that it was easier to negotiate an enterprise software license than to negotiate the price of every piece of software, manage license compliance and worry that every time it added capacity or changed something about the hardware, the company would be hit with another charge. "We did a five-year enterprise software agreement with Hitachi and got it at a significant discount," he says. The vendor initially resisted the idea, but finally came to see the enterprise software license as a way to solidify a relationship with a company likely to buy large amounts of storage for years to come.

No. 6: Take advantage of new pricing and licensing models where appropriate. Gartner reports that traditional storage pricing models are starting to undergo dramatic change. A number of factors are driving this shift, including the increased importance of software, shorter product cycles, shrinking hardware margins and new capabilities such as capacity on demand. As a result, "enterprises should carefully examine special pricing models, such as utility pricing," Krischer writes.

Enterprise storage software licensing, for example, is one new model. Another new model is capacity on demand, where the vendor charges only for the capacity that is used. Capacity on demand promises to eliminate the need for organizations to overload on storage capacity to ensure it is there when they need it. With capacity on demand, the capacity is physically there, but the organization doesn't pay for it until it initiates a process to activate it. Different vendors are experimenting with various approaches to capacity on demand, but the industry has yet to settle on a standard approach.

C2B2 is about to jump into the uncharted waters of capacity on demand. The organization has seen its storage requirements grow from 1TB to 12TB in three years. A user of BlueArc's NAS storage, C2B2 is now preparing an RFP for 100TB of storage, which it wants delivered as capacity on demand. For C2B2, the benefits of capacity on demand are clear. "We'll save 30% to 40% by buying in bulk, and we won't have to wait for shipping when we need more capacity," says Restuccia. C2B2 has already started discussing with BlueArc how the capacity on demand model might work.

TCO is the bottom line
In the end, success at price negotiation comes down to understanding TCO. The best price is the price you can afford to live with over the life of the technology. If you have to retrain staff, invest in additional tools, modify your applications, change your business processes, track complicated software licenses or limit your future options, then a low acquisition price may not be a bargain. Still, it pays to negotiate the best deal you can. According to Gartner, storage will represent up to 26% of the data center TCO and 48% of the hardware budget by 2006. That's a big chunk of change. The time to negotiate savings is now.

This was first published in March 2004

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