I was at the launch of Acer's rather attractive new line of laptops in New York this week, and one of the first things they said was that they had no desire to directly target large enterprise or government accounts.
During this time, Eliot Spitzer, governor of New York, resigned as the result of behavior I hear is way too common with government and enterprise buyers.
Let's talk about what one has to do with the other, why vendors are starting to avoid large buyers, and why that is bad for both the vendor and the enterprise IT market.
Why Selling to the Enterprise and Large Government Is Dangerous
If you've been watching the PC market, you saw how Dell dropped from market leader to number two and then number three, behind HP and Acer. This is largely because a high percentage of its customer base is large enterprise, while HP is a mix, and Acer is focused on the consumer and small business market.
Consumers, while often seen as fickle, are relatively brand loyal, will pay extra for perceived value (including design), and currently actually seem to be cycling their hardware more often. This means they contribute more to the vendor's bottom line for every sale and actually reward a vendor with return business if it goes out of its way to make the consumer happy.
Enterprises, regardless of the service they get, generally buy on price and only lock out vendors where the experience has been particularly bad. They seem to ignore much of the value-added services supplied by vendors. They regularly strip and reload purchased PCs with their own software, which never was tested on their machines by the hardware vendor, and then often expect that vendor to either fix or pay for any resulting problems.
Through aggressive bidding processes and reverse auctions, enterprises do save a lot of money, but deals often drop into the red and vendors have to play games by charging more for hardware that isn't part of the original contract or for services that might have otherwise been included in order to break even or possibly get a profit.
Enterprises use services from large research firms to ensure they are getting the best price, but often these services report target prices that aren't well founded and drift below vendor costs, driving what could have been profitable business into unprofitable territory.
Large enterprises also tend to dictate contract terms that delay payments 90 days or more for products already received, effectively driving down a vendor's liquidity with costs that are difficult to recover.
Government, particularly large government, is even worse. It often requires massive amounts of documentation before the vendor is even allowed to bid. This documentation can increase the cost of a deal significantly and part of it requires the disclosure of the vendor's ethnic employee mix and contracts with other large customers. In particular, it is common for government contracts to have "most favored nations clauses," which require the government account -- regardless of contract price -- to get the best deal the vendor has given. Governments often require adherence to a wide variety of changing rules that companies simply are not set up to easily comply with, creating a drag on the agility of the firm and what can often seem like a never-ending nightmare for those that have responsibility for the accounts.
Even though they generate little profit, key decision makers for many large government accounts and large enterprises expect personal "perks," which can include vacations, hookers, cars, and expensive nights out on the town. These are generally artfully concealed as business trips, prizes or conventions (among other things). All of which could, if disclosed, get everyone involved in a ton of trouble. But if the vendor screams foul, it could be permanently banned from the government or business that got ratted out, and possibly much of the segment, as well.
Thankfully, not all government officials or enterprise buyers are like this. Yet enough are to make the risks -- coupled with the lack of profit -- unattractive to companies like Acer.
Why This Is a Bad Thing
First, the possibility of some of these questionable vendor care programs becoming public is increasingly likely, given the massive increase in shadow data and the aggressive mining by enforcement agencies. We just saw the governor of New York brought down through one of these investigations. The as-yet-unnamed other folks alluded to in the situation are likely business men who have been concealing the prostitution charges as legitimate business expenses and don't yet realize their careers and companies may be next in line to be made part of this scandal.
In addition, when companies don't receive a reasonable profit, they tend to work at being creative with charges. This results in budget overages that don't reflect well on the related IT organization and further sour the relationship with the vendor.
Finally, the current arrangement often favors those that can creatively ignore rules and not get caught. While useful, this skill used in excess generally is what populates prisons. It might be better to ensure that creativity is focused on making the overall relationship more profitable for both the IT organization and the vendor rather than excessively breaking rules and laws.
I think a fix for this might be rethinking the bid process to focus more on demonstrated customer care areas like historic system reliability, meeting delivery expectations and customer satisfaction. Prices should be set at a percentage over cost in line with the vendor's current reported gross margin. This shifts the reward structure toward performance and away from price, removing much of the incentive to creatively cheat.
I also think IT organizations in governments and large businesses should look at their payment and contract requirements regularly to ensure they aren't excessively painful. By doing these things, or something like them, the enterprise could both become a more attractive place to do business for companies like Acer, and less likely to birth embarrassing behaviors like those that just cost the New York governor his job.