Vendor contract negotiations are built into IT procurement cycles. Companies renew deals for ERPs and CRMs, cloud and add “as a Service” data, security and BI features as a regular part of business operations, mostly without incident.
That can all change as the markets shift and economic factors intervene.
IT budgets are set to increase by an average of just over 5%, according to Gartner’s analysis. But inflation has also been on the rise, cutting into the real value of each dollar spent.
Gartner projects inflation to average around 6.5% in the coming year, which is better than the 8.2% reported by the Bureau of Labor Statistics for the 12-month period ending in September. But it’s still high enough to cut into tech budgets, where even a 1% shortfall in dollars can be difficult to absorb.
As CIOs prepare budget belt-tightening and vendors look to maintain profitability, someone’s going to have to give ground.
Eliminating price increases is difficult. Negotiating them down is often the next best option, according to JoAnn Rosenberger, distinguished VP analyst at Gartner.
Gaining leverage is the key for procurement teams and CIOs, Rosenberger said at the Gartner IT Symposium/Xpo on Tuesday. She laid out a four-step process for countering vendor price hikes:
Ask the right questions
The first step is to look for a renewal price increase cap in the vendor contract. If there isn’t one, make a note to build one into the contract renewal.
In the absence of a cap, ask for a line-item breakdown, one that separates, for example, SaaS, implementation, support and training costs.
If you have a perpetual license on one or more of the vendor’s products, find out whether your organization needs to pay for support.
“Some companies can live on perpetual licenses for years without support,” Rosenberger said.
In some cases, it may be possible to third-party outsource one or more vendor services, such as implementation or training. This is a potential cost cutter and means of gaining leverage in the negotiation.
Finally, ask the vendor to supply the list price and the entitled price for the product or service, as well as for an official announcement of the price increase to ensure that the new rates apply across the board to all vendor clients.
“Vendors hear this all the time, so you shouldn’t ever be worried about pushing,” Rosenberger said.
'Vendorize' your negotiation strategy
Do some reconnaissance on the vendor prior to crafting a counteroffer.
For example, look at quarterly earnings reports for the financials. A vendor with healthy financials is in a better position to give ground than one with lower earnings.
“You’re trying not to make it a combative situation between you and your vendor, but you want to put yourself in a powerful position,” Rosenberger said.
To that end, she recommended looking into how the vendor’s sales team is compensated for support renewals versus new product sales.
Typically, commissions are less for renewals than for new products, and new sales are more highly incentivized from a commissions standpoint, Rosenberger said.
This is advantageous when a vendor is offering a new product with deeper discounts than renewals on existing products.
Create deal-specific cost models
Once you’ve found your leverage points, build them into a coherent counteroffer.
Get quotes from third-party vendors and competitors, if only to improve your bargaining position. Use economic indicators and BLS data to determine actual cost increases for labor and materials.
And determine which services your organization needs and which can be cut out of the deal.
“I don’t see clients doing a great job building in enough time to do their homework,” Rosenberger said. “It’s basically having your IT and other key stakeholders, such as asset management, vendor management and business owners report back on how they’re using the [vendor’s] products.”
Execute your plan
The final stage in the process is the presentation of the counteroffer.
Timing can be key. Presenting a counteroffer tied to the end of a vendor’s fiscal year or end of quarter often puts pressure on the sales team to get the deal done and on the books.
For enterprises that rely on procurement teams to negotiate vendor contracts, getting the CIO and CFO involved at this stage can be advantageous.
“It’s always good to use C-level power,” Rosenberger said, particularly on specific leverage points.
“Get the CIO involved and tell the vendor that either your CIO or CFO is requiring in writing a statement that you are implementing the price increase to all customers worldwide.”
In a difficult economy, negotiations are challenging and meeting a vendor halfway is often necessary. But investing the time into a rigorous negotiation can be worth the payoff.
“If you don’t ask, you don’t get,” Rosenberger said.