No guts, no glory in IT contract negotiations

For IT shops that would rather reduce prices on vendor contracts rather than reduce their staff, the ability to negotiate has become an in-demand skill for today’s IT leaders.

“IT professionals under financial pressure are turning to haggling to an extent that we haven’t seen before,” said. Andy Woyzbun, lead analyst at London, Ont.-based Info-Tech Research Group Ltd. “It’s not something that we’re used to in our North American culture or feel comfortable doing.”

The key, he said, is to realize that there are no fixed prices — even for the smallest IT shops — and the IT leaders who have the courage to drive a hard bargain will experience success.

Info-Tech interviewed dozens of IT professionals about the tactics and strategies they used to haggle with IT vendors. Here what it found.

Do your homework

On the whole, organizations do not significantly prepare for contract negotiations, Woyzbun said. This should be avoided at all costs and is inexcusable for contracts which are entering the renewal process.

“Anytime you enter into a contract, make sure you put a calendar entry in your schedule about a month before it’s due to come up for renewal,” he said.

To be able to successful negotiate a reduced price, you have to understand what products and services you actually need to get out of the deal. “Vendors throw in some extra stuff that may have little value to you, but it will cost you money,” Woyzbun said.

The key is to identify the “must-haves” and get the “nice-to-haves” out of the contract, he added.

Additionally, negotiations that fall at the end of a quarter or year can be advantageous for IT shops looking to take advantage of a vendor’s eagerness to make a deal and should be noted before heading to the bargaining table.

But a good deal is only a good deal if you’ve done your research, Woyzbun said.

“They’ll say, ‘If you sign now you’ll get a 25 per cent discount,’ but if the price wasn’t competitive to begin with it’s not a good deal.”

Price isn’t everything for some vendor

While selling you the most expensive services it possibly can is the goal for most vendors, sometimes you will offer them intangible value as a customer and can trade this in for some cost savings.

“Especially if you’re dealing with a new piece of software or service, your reference might be critically important to them and you really need to use that in your negotiations,” Woyzbun said.

He added that it’s really important to understand the value that you bring to the vendor and put yourself in their shoes.

Let me talk to your boss

Anytime you are negotiating a price reduction, it’s crucial you are actually speaking to someone with enough authority to pull it off, Woyzbun said. If you can’t get a vendor executive into the room, chances are you aren’t making any progress at the bargaining table.

Several of the IT professionals interviewed by Info-Tech said that only after they were able to escalate their requests to senior executives were they certain that the vendor was hungry to get a deal done.

Having an exit strategy

As software-as-a-service applications continue to gain traction, a growing number of IT shops are being forced into longer-term contracts, according to Forrester Research Inc. analyst Liz Herbert.

“In the past, I was seeing a lot of contracts that were trial-based, month-to-month. Companies didn’t want to commit,” Herbert said. But more recently she has seen deals as long as five years.

Vendors are using deep discounts, even beyond 50 per cent, to help seal such pacts, she said. But companies that do sign long-term SaaS deals should consider what will happen after the term expires. For example, it is wise to include language in the original pact that limits price increases for subsequent contracts, she said.

For Woyzbun, ensuring that you have an exit strategy built into a contract if the vendor is performing poorly is a key area to consider when bargaining. “The kind of relationship that’s valuable for a vendor is a longer one, but you’re going to work some flexibility in,” he said.

Still being able to show you’re willingness to enter into a long-term relationship will be a key in building trust and getting cost savings.

– With files from By Chris Kanaracus, IDG News Service (Boston Bureau)

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