I’ve seen hundreds of IT teams (engineers, procurement, datacenter people) completely misunderstand and mismanage the purchase and deployment of one of their most important assets – global IT infrastructure (for international, non-US sites) .
It’s quite a specific line item, but if you’re in a multinational organization, it’s meaningful – we’ve saved some of our clients over $250,000.00 on one purchase alone! (This specific purchase was datacenter equipment, e.g. servers, switches, cables, etc. that was originally going to be bought in-market in Brazil.)
Is this just a problem when buying in-market in Brazil?
Based on the work we’ve done with hundreds of multinational companies, this is not a problem that’s unique to Brazil. The inefficiencies that come with buying in-market is a problem that we see all around the world, with a caveat:
Pricing is less of a problem (but sometimes is still a problem) when buying in “Western” markets, like in Europe and Canada, and more of a problem in “non-Western” markets, like in Egypt and Brazil. Cost reduction, however, is one of the less important factors for IT organizations when it comes to deploying global IT infrastructure. The larger problem is that the in-market model has massive infrastructure-operations problems.
In a world where global IT infrastructure is the lifeblood of most multinational organizations, why do such inefficiencies exist?
The purchasing of IT infrastructure for non-US destinations, is one of the most misunderstood assets for most multinational companies (maybe next to cloud).
More specifically, if you don’t understand how your vendors (Original Equipment Manufacturers / OEMs for short, Distributors, Value Added Resellers / VARs for short, etc.) deliver solutions to you, you lose buying power and control, which results in higher costs and more importantly, it reduces your utility.
In this post, I’ll dive into the core learnings that we’ve come across at FGX over the past few years from working with multinational organizations of all sizes. After reading this, you’ll be in the top 1% of CIOs, engineers, infrastructure and procurement people that understand how IT hardware is fulfilled (and thus bought) globally. You will also understand how FGX is solving this problem, and hopefully, that will help you generate your own ideas on how to make the industry work for you.
Global IT Infrastructure Purchasing: 30,000 Foot View
It all starts with understanding what the in-market model looks like and why it’s inefficient, since this is the predominant model for how most global IT infrastructure purchases are fulfilled.
- You reach out to an in-market VAR (e.g. a company that’s based in an international, non-US location, for example, in Brazil) that can sell you the hardware you want to buy e.g. Cisco, Dell, etc.
- You ask them for a quote. They add up their costs, which are broken out below:
- OEM Cost: The in-market VAR has to get their cost for buying the hardware from their distributor (who gets their cost from the OEM,) by asking them. The OEMs markup international deals more than domestic ones, basically because they can, but we’ll talk about this later. This is a big part of the cost and we call this the “international mark up.” For example, if it costs a VAR $100.00 to buy a device in the US, in Brazil it would cost $140.00 for the same exact device. Of course, this cost is passed on to you.
- Logistics Cost: The costs for hiring a freight forwarder, customs broker, and distributor to import the equipment on their behalf. This includes paying duties and taxes, managing paperwork, licensing, and logistical fees. This often gets baked into a single line item instead of being broken out. Sometimes it’s asterisked in fine print.
- The in-market VAR adds up all of their costs, marks it up, and then presents you their quote (if you’re hiring a US domestic VAR to consolidate your in-market VARs, they will add their margin as well)
- You accept the quote and are left wondering why it was that much more expensive.
- You onboard the in-market VAR, pay them in advance, and wait for the gear to arrive with no reliable ETAs. Or, if you used a US VAR to consolidate in-market VARs, you wait for them to get a reply from the in-market VAR.
- Rinse and repeat for every country you need infrastructure in.
What’s wrong with the above model? Is this really a problem?
I’d say yes, and if you have any experience buying or deploying hardware for international sites, you’d probably agree with me. It’s expensive and operationally inefficient. For example, the above process needs to be repeated for each new country you need gear in. It forces you to onboard and manage dozens, if not hundreds, of vendors globally. This creates all sorts of redundant costs and operational overhead, and that’s just the tip of the iceberg. Don’t forget the soft inefficiencies, like language barriers, time zone management and cultural communication differences — those add up!
To further understand why the in-market problem exists and how we can address its shortcomings, there’s an important question to answer: If the problem is that bad and painful, why hasn’t a better solution already been created?
I’m sure there’s no one answer, but let’s try to reason it out. We’ll start by analyzing the parties that theoretically have an incentive to innovate on the in-market model, since that’s where a “better solution” would typically arise from. The parties are typically the buyers of the hardware themselves and their vendors, aka, “channel companies.”
Buyers are incentivized to create a better solution because it would reduce their costs and save them time, and the channel would want to provide a better quality of service to gain a competitive advantage.
However, both parties—as far as I know—haven’t created better solutions. Most buyers and channel companies still rely on the in-market model.
Why haven’t buyers created a better solution than using in-market VARs? IMO, it’s because it’s a problem they rely on the channel to solve. It makes logical sense too. If I’m going to buy hardware from you, you better supply me with the solution to use it! Which includes getting the hardware to the international site. Also, even if a single buyer has created a better solution within their own company, it’s not a solution they would sell and distribute to other buyers.
So, the onus to deliver internationally is often put onto vendors / the channel. So, why haven’t vendors created a better international solution for their buyers? Without going into the exact mechanics and nuances, because that would make this post even longer, it’s because international fulfillment is a problem they can’t solve themselves.
They can’t solve the problem themselves because one, channel companies aren’t logistical companies (which is where the problem is rooted,) and two, they are in competition with other channel companies. Even at their best, channel vendors can only solve their part of the problem. They won’t provide solutions for products you buy from other vendors and thus they can never address a buyer’s entire global IT infrastructure requirement.
To add on top of that, channel companies don’t have any incentive to improve on their solutions because they don’t need to make global IT infrastructure purchasing efficient or cheaper for their clients (keyword global.) The costs and risks of innovation outweigh the financial incentive to do so.
For example, if you want networking devices, you’ll buy from Cisco one way or another. In the era of supply-chain shortages and hoarding, this problem is even further exacerbated. They have their buyers in a captive audience that will buy from them no matter what.
The lack of competitive pressure certainly doesn’t help, e.g. VARs, like SHI, WWT, Insight have very similar international fulfillment models (they either white label in-market VARs or create an in-market VAR referral program. So either way, you’re still using an in-market VAR.)[ US VARs that “do” international are almost always reselling and repackaging in-market VAR networks they’ve created. ]
There’s a massive rift between what is beneficial to buyers and what channel companies can and are willing to do. (Side Note: VARs ultimately work for the OEMs and not the client. This might not be seen at the tactical, micro level, but is more apparent in the macro. To learn more about the power dynamics between them, read this.)
Luckily for the channel, their buyers don’t have much of a choice and don’t even know when something is inefficient or expensive because they’re benchmarking their purchases against very similar solutions. This usually means that buyers are negotiating for 1 or 2 points instead of something more meaningful and can only make incremental improvements to their processes.
In summary, most of the vendors that have looked to solve international IT problems have come from the channel, which is a problem. Put another way, the channel can’t represent their buyer’s best interests because they have to represent their own.
If we can’t create better solutions by being in the channel, let’s look at it from an outside perspective.
Breaking Down the In-Market Model
Since we (FGX and probably you, if you’re reading this) don’t sell infrastructure, we aren’t in the channel, and thus, we don’t carry the weight of having to protect our existing business models and its interests. With this agnostic viewpoint, we can look at the global IT infrastructure problem differently than the channel does.[ Similarly, marketplace businesses like Airbnb and Uber that don’t sell the actual thing their buyers are purchasing, have the same advantage – they can create a solution that isn’t pandered to the industry’s incumbents, in their case, the hotels and taxi companies, respectively.
They can create solutions that are agnostic (they don’t need to prefer one vendor over another, meaning that buyers have more options) and market driven (buyers having more options means an increase in competition, which lowers pricing and increases quality of service.)
Also, another one of the major reasons that innovative solutions often come from the outside of an industry is because the outsider doesn’t have to risk cannibalizing existing assets or profits. It’s nearly impossible for the channel to innovate on their global IT solutions without damaging their current supply-chain infrastructure and profits. ]
Let’s look at this problem from a supply-chain perspective, since that’s where the problem lies. When you order infrastructure for a global site, the order needs to be fulfilled internationally. What does it mean to fulfill an order internationally? At its core, it refers to how physical assets are moved from one country to another. If we can understand how the assets are moved internationally, we can solve the problem using first principles.
So, let’s get to it! Let’s examine the in-market model we’ve been referencing. What happens when an international order is placed with an in-market VAR—which is what most buyers do when they buy for an international site, whether they know it or not.
In Market Model (Simplified)
- You approve a purchase with an in-market VAR (or a US VAR that “does international”)
- The in-market VAR buys the hardware from a distributor who buys it from the OEM.
- The in-market VAR, via the distributor, imports the equipment.
- The in-market VAR resells the hardware back to you.
The in-market VAR buys the hardware from the distributor who buys it from the OEM. The OEM charges the distributor (and thus in-market VAR) a higher MSRP than they would a VAR in the states, because they can.
The in-market VAR then imports the equipment, paying duties, taxes, logistical fees that get passed onto the client. Then they mark it up to cover their overhead and to turn a profit.
But if a company could just ship the hardware to the global site, then why do buyers need to bear the OEMs and in-market reseller’s margin? They don’t. (Don’t let this mislead you, this is not “just” a shipping story, more on that later.)
Full disclaimer: It’s not always cheaper to buy and ship than it is to buy in-market. It depends on the volume purchased and destination, but for nearly all infrastructure purchases, we find this is the case.
As I’ve mentioned earlier, cost is the least important of factors when it comes to the in-market purchasing model. Based on our conversations with our clients, the number one pain point they all shared on buying in-market is that it carries a lot of operational overhead and systems complexity.
For example, purchasing hardware for a new country means using a new in-market VAR, which means a new vendor to onboard, manage, and pay. You might even need multiple in-market VARs due to one only selling Cisco and another only selling Dell. For a multinational company with a complicated stack, this could result in hundreds of vendors.
We’ve seen organizations try to solve the problem by using a US VAR to consolidate their in-market ones. But now you have to pay another markup for purchase and process consolidation and you’re playing telephone to the “nth” degree to get anything done.
But most importantly, by purchasing in-market or through the channel in general, one, you lose the ability to have a vendor agnostic solution, and two, are unable to ever centralize your inventory. Without those two things, you cannot create scalable and fluid systems around how you manage your global IT inventory and delivery.
A Better Alternative to the In-Market Model
Can this problem be solved? Yes, just like how we can remove middlemen with shipping, what happens if we ship the hardware with an agnostic provider instead of buying in-market? It means that you can centralize!
With some imagination, one can see the kind of benefits that this creates and the solutions that become possible. Buyers can:
- Take advantage of purchasing and storing ALL equipment in a low cost market, like the US.
- By buying all of the equipment in one market, buyers can consolidate their spend and thus purchasing power. Some companies that have switched from an in-market to centralized model have gone from hundreds of hardware vendors internationally to just a dozen.
- Consolidate and store purchases from multiple vendors in the US.
- Buying in-market doesn’t allow for vendor consolidation.
- Buying in the US and storing gear at a facility before it’s time to deploy enables you to take advantage of OEM discounting periods. You can buy hardware at a discount and store them even if the equipment isn’t needed immediately.
- Deliver purchases only when space is ready, which introduces reliability into IT planning.
- If everything was bought in-market, you’d never be able to consolidate deliveries. You’d have to accept them when the delivery is ready, even if your space isn’t ready to receive it, which makes project management extremely difficult..
- This removes channel variability when it comes to their delivery (or lack thereof) capabilities. They often fail because they’re manufacturing or sales organizations, not supply-chain companies.
- Stage, rack-and-stack and configure any and all equipment before it arrives in-country.
- This saves engineers having to fly out to an international site.
- Also, this reduces the amount of work and reliance an IT team needs to give an external remote hands resource (which is usually less skilled than the IT team themselves)
- This allows the standardization of IT infrastructure globally.
- Integrate remote and/or smart hands services into the delivery process.
- This makes project management easy, which is even more valuable during the era of COVID.
- Have complete control and transparency over their entire global IT hardware inventory.
I could triple this list, but I think you get the point.
So, am I telling you that the solution to the problem is just to buy the hardware in the US and ship it? It’s kind of crazy to say, but if you boil this down to its simplest terms, yes. But there’s an asterisk.
That asterisk is a question that arises in most people’s minds, just like in mine, when I first joined FGX – can’t I just ship IT hardware with FedEx or a freight forwarder? What’s so hard about shipping? I get Amazon prime next day delivery for products from all around the world. The world runs on things being able to be shipped!
If you’ve tried shipping IT infrastructure yourself, as many have, you know the answer. (Maybe you’ve had to ship because you wanted to escape the in-market model long before you read this post, or maybe it was out of necessity because you couldn’t buy your gear in-market, etc.)
It’s hard because there’s a lot to it. There’s licenses, compliance and commercialization concerns, incoterms, tax implications, intangible vs. tangible declarations, hardware testing requirements, etc. What happens if a shipment gets stuck in customs? What if your freight forwarder treats your shipment like a sack of potatoes and spears it with their forklift? What if your entity in the foreign country needs to realize the assets on its balance sheet? The list is too long for my carpal tunnel afflicted wrists to type out and too exhausting to recall. Basically, when it comes to international trade, at the commodity level, IT hardware is highly controlled.
Traditional logistics providers, like freight forwarders, do not focus on specific commodities. They’re focused on bulk and consolidated shipping. Why? Because that’s how their business model works. Additionally, since the majority of most logistics providers’ revenue does not come from the enterprise IT buyer, there is little incentive to address their specific use-cases.
Put another way, if FedEx and freight forwarders were capable of deploying IT internationally, then the channel (especially distributors) would probably have a better solution than using their in-market counterparts. But they haven’t, which is one of the reasons for why the channel relies on in-market vendors.
It’s difficult to ship IT hardware internationally. But because it’s hard, it’s worth solving. And what’s even harder is to turn “shipping” into something more: a platform that can become the rails on which companies move, manage, integrate, and materially handle all of their infrastructure globally. It’s why we’ve dedicated all of our time to it. At the moment of writing, we’ve deployed and continue to deploy our clients’ IT hardware into over 170 countries.
Although we’re already working with some great companies, we’re still in the early days of businesses moving away from in-market vendors. And while we have a long way to go, I do believe that at FGX, we’re trailblazing the future for how IT organizations will look at and consume global IT in the decades to come. If you want to get involved, reach out. We’re always looking to add to our cause.
– Domestic management of this commodity is good enough from a pricing and asset management view, on average.