Online Extra: Q&A: When Buying IT, Price Isn't Everything

A tech purchaser explains why paying more is sometimes worth it and why competition is good, but too many vendors isn't

At Progressive Corp., the No. 1 underwriter of motorcycle insurance and No. 4 underwriter of private auto insurance in the U.S., technology controller Jerry Winchell manages more than $100 million of spending a year. Thanks to those investments, the Mayfield Village (Ohio) company (PGR ) is the leader in selling auto insurance over the Internet. It was also the first car insurance company to offer wireless access to its site. Winchell talked about IT purchasing with BusinessWeek Online reporter Olga Kharif on May 24. Here are edited excerpts from their conversation:

Q: When making IT purchasing decisions, what are you looking for? And how important is price to you?

A: Price is still an issue, but in some cases less so. Clearly there are cases where you can get almost as good a product for less. We still look for those opportunities. We find them on things like PCs -- they've been very much commoditized.

But that's where Dell comes in: They've got an automated, Web-based sales and fulfillment system. So it's kind of easier to work with them than it has been with some of the other companies. That's important. We consider things like: How do you interact with them, and how electronic can it be, and [can it] reduce the intensity of manual effort? That's an important thing in making purchasing decisions.

It also depends on what the relationships in the market are. For example...IBM is going to be the sole source of our mainframes. They're the only really big player these days. You really have to get into more of a partnership relationship because you [can't] just play companies against each other, as we used to before, with three or four mainframe manufacturers.

And then there's the qualitative component. There are clearly people out there that continue to get a premium [price] because their product just seems to get better results in terms of less downtime. And since everybody is trying to get to 24/7 operations, that's really important now.

Q: Do you tend to use fewer suppliers for your purchases?

A: Normally, we like to have more than one supplier, because when a company becomes a sole source, it becomes less competitive. But what we also like is to keep them [to] as few as we can because otherwise it gets crazy to try to manage relationships with too many vendors. That's especially true on the support side.

Let me take a good example -- cellular phones. Because we work across the country, we have contracts with many, many wireless firms, a lot of them very localized, regionalized. It's very inefficient because a lot of them can't give you electronic billing and things we've come to expect. So there it's a question of taking 50 cellular vendors and trying to get that down to a manageable number, maybe five or six.

At the same time, Xerox so dominated the mainframe printer market that there we were actually looking to get some competition. So when OCE came along with some printers that are even faster than Xerox and could be used for about 50% of our print, that was a good situation.

Q: Do you prefer to buy or lease equipment?

A: We tend to buy most of the things on the client/server side -- servers and PCs. Where we lease is more on the mainframe side, and the issue is less the financing part of that than just the planned obsolescence and the rollover of the mainframe equipment. We tend to very rarely keep equipment for more than two years.

Q: How is this year's IT purchasing for you different from last year's?

A: The difference is probably in the rate at which we're purchasing. We're tending to purchase fewer PCs and services than we did a year ago, when we were upgrading much of our environment for Y2K. Yet, this year we bought an awful lot of equipment. Just last month we opened our new data center. And we've made some further investment on the mainframe side with central processing units and disk and tape for that.

Q: Do you expect to get back to the Y2K-era level of spending? And how soon?

A: Well, later in the year, we're going to start this serious rollout of Windows 2000. Also, new versions of some of our applications will be coming out later in the year. So, I would expect things to start picking up in the fourth quarter.

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