The economic crisis is negatively affecting software vendors and service providers as much as it is impacting you. Industry experts are now advising IT leaders to take advantage of the tough times and improve vendor contracts by focusing on long-term goals rather than short-term benefits.
In a panel discussion Wednesday, Forrester Research Inc. analysts outlined some of the mistakes that CIOs and IT managers are making during today’s ugly economy as it relates to vendor performance and relationships. With more IT professionals being hunkered down with smaller budgets, the pressure is on to cut costs and do more (or equally as much) with less.
1. Post-contract: Willingness to trade something for concessions
Trying to go back to the bargaining table and negotiate an existing outsourcing or service agreement can be difficult. Paul Roehrig, principal analyst at Forrester, said begging for a lower price or threatening your service provider with strong arm tactics will work, but only in the short-term.
“What clients undervalue are the long-term implications of these tactics,” he said. “Unless you are materially overpaying, there’s not much room for a lower price point without changing your services.”
Roehrig advised IT leaders to think about which technologies they need and try to get rid of the ones they don’t need. For example, rather than signing on with a gold-plated service level agreement, enterprises would be wise to scale back to silver and bronze services.
“If you’re asking for the highest levels of services from everyone across the enterprise, when the reality is that everybody can function well without that, you are wasting money,” he added.
Duncan Jones, senior analyst at Forrester, said that companies with multiple business units – each dealing with the vendor separately – would be wise to consolidate their dealings wherever possible.
“Go to the vendor and ask them how you can earn cost reductions by dealing with them in a more centralized fashion,” he said. This includes handling support calls and contract negotiations with one department, as opposed to multiple business units.
2. Pre-contract: Don’t rush into things
In times of economic crisis, Roehrig said, enterprises will try and speed up some of the things they want to do in an outsourcing deal and skimp on the internal preparation.
“Things like internal management of change, getting all the managers and end-users on-board and keeping good lines of communication open are part of the foundation of a good, healthy outsourcing deal,” he said.
3. Spend in certain areas to save in others
Jones said that IT leaders should put themselves in the vendor’s shoes when entering a negotiation. For instance, enterprises must bear in mind, he said, that the software representative trying to sell them a service contract might have vastly different goals than your organization as well as their vendor.
“He needs to sell you new licences and hardware to keep his job and has no interest in cutting costs,” Jones said. Instead of trying to renegotiate costs first, he advised companies spend in certain areas of need to get discounts or concessions in other, less important areas.
Sometimes that means going up higher in the organization to people that can actually give you more flexible prices, Jones said. “You always have to keep in mind that a rep might be struggling to make his number and could be at risk of losing his job.
4. Draft mutual agreements
IT leaders must start thinking about mutual agreements and shared risk with their vendors. Enterprises need flexibility now and IT leaders should not forgive vendors who don’t help them out in today’s struggling economy, Jones said.
“We’re going to be much less likely to come back to vendors later, if they don’t help us now,” he added.
True outsourcing involves shared risk, which Forrester recommends, and can be achieved by baking gain-sharing clauses right into the contract.
Roehrig said that most IT organizations are not doing a good job of modeling risk when negotiating the terms of their agreements. “The economic crisis necessitates a focus on financial transparency and transparency of operations,” he said.
Building price-reduction guarantees and a governance relationship process into your service contracts can lead to a better business partnership for all parties, Roehrig said. Having a strong line of communication with your vendors will also allow them to create products and services better geared toward your needs.
5. Plan for vendor consolidation
While creating a more mutual service contract with a vendor is important, IT leaders also want to be sure they protect themselves. In today’s economy, Roehrig said, enterprises should almost assume that their service provider will consolidate or partner with other companies.
He advised IT professionals to look at implementation change-of-control clauses, which allow you to potentially exit a contract upon consolidation. Other provisions to consider include termination clauses that can allow you to opt out of an agreement based on cause or your vendor’s financial issues.
“So basically you could revise or terminate a contract with evidence of financial trouble, such as a bond rating drop,” Roehrig added.
When it comes to software agreements, most enterprises are buying into a set of features and the expectation that those features will be enhanced, Jones said. If you suspect the stream of features and enhancements will be shut off in the future, consider that when drafting or revising your service agreement, Jones said.