The deals IT leaders make with technology vendors and service providers are of strategic importance, making effective negotiation a difference maker not just for IT, but the business.
In an IT marketplace marked by turbulence, inflation, and economic uncertainty, the process of contracting with vendors for technology products and services has gotten significantly more challenging for CIOs.
IT leaders may find that prices are going up without an accompanying increase in benefits, with technology providers — less dependent on any one industry or geography — taking a harder line on deals, says Achint Arora, a partner in the pricing assurance practice at Everest Group.
“Prices are increasing, and negotiation is becoming more difficult,” agrees Melanie Alexander, senior director analyst on Gartner’s sourcing, procurement, and vendor management team. “Vendors are not granting the same concessions they have in the past.”
Evolving regulations related to data privacy, data sovereignty, and responsible AI further complicate matters as customers and vendors work out the responsibility and costs of meeting increasingly stringent requirements.
What’s more, technology contracts are often multilayered. The SaaS provider you’re negotiating with may be constrained by its own deals with IaaS vendors and IT service providers.
“Today’s biggest challenges are complexity and compliance,” says Brad Peterson, a partner in Mayer Brown’s Chicago office and leader of its global technology transactions practice. “There are an increasing range of technologies and providers. Technologies such as AI and processes such as agile make it more difficult to know what commitments to seek. The group of stakeholders keeps growing.”
Pricing models and metrics can also be complex, making it difficult to understand when additional costs might kick in, Alexander says. Indeed, the arithmetic can be downright opaque.
“Some contracts are structured as a black box with limited view into the components and their commercial impact,” Arora says, adding that buyers with limited access to market data are at a disadvantage when negotiating. “The sell side typically has the information advantage.”
Technology capabilities, often provided by third parties, are intrinsic to business operations and growth, so the deals IT leaders set up with their vendors and service providers are of strategic importance, making effective negotiation a key difference maker not just for IT, but the business.
CIO.com talked to technology transaction experts, who live and breathe contracts and pricing, about the best actions IT leaders can take to negotiate effectively with vendors for the outcomes they seek. Here are their top 10 tips.
Recognize the significance of the contract
The legal agreement between vendor and customer is not just a document standing in the way of getting work started; it sets the tone for the relationships and the expectations for vendor performance. If what you’re looking for isn’t in the contract, it won’t happen.
“The biggest missteps seem to flow from applying approaches that succeed internally across organizations,” says Peterson. “This causes the IT leader to underestimate the role of the contract as the foundation for the relationship and the importance of the supplier’s incentives, culture, and business to the success of the contract.”
Build in the time for back and forth
Coming to terms takes time that IT leaders should factor into the process and any business expectations for how quickly a deal can be done. “We often see that IT leaders do not allow enough time for a successful negotiation,” says Arora. “Reaching a win-win agreement takes patience from both parties.”
This is particularly important for as-a-service contract renewals. “Neglecting to track contract renewal dates inevitably results in little time to effectively negotiate,” says Alexander. “Proactively manage software maintenance and support renewals, as well as SaaS renewals, and allow enough time to truly evaluate how these deals fit your technology roadmap.”
Seek cross-functional expertise and input
A host of issues can crop up when those who do the negotiating are disconnected from those who operationalize the agreement, says Marc Tanowitz, managing partner in the advisory and transformation practice at West Monroe.
“That causes some friction as the operations that are conceptualized in the agreement don’t necessarily make their way through to the delivery team,” Tanowitz says. “This can ultimately erode confidence and value delivered to the client.”
Before negotiating with any supplier, IT needs to get on the same page with other business leaders regarding core objectives, risk appetite, and standards by which to assess deal terms — before a product or service contract is even on the table.
“IT sourcing is a team sport,” says Peterson. Deals done by business users alone may be technically unsound. Deals done by procurement professionals alone may reduce costs but disappoint users. Deals done by IT departments alone provide leading-edge technology but often at high cost and legal risk. That’s why IT leaders should build an advisory team — or at least get appropriate input — when deciding on key deal points.
Peterson advises creating a team with representation not just from IT, but also users, operations, finance, procurement, and legal. “Get specialists advice early, to avoid costly pitfalls,” Peterson says. “[And] run an informed, efficient, effective process designed to make good decisions while building good relationships.”
Look beyond price
It’s the biggest misstep Tanowitz sees in vendor negotiations? “Over-indexing on price — for example, the perceived lowest cost —rather than value,” he says, adding that IT buyers who work collaboratively with their service providers to structure full solutions that add value to their enterprise end up with greater satisfaction levels in their IT service provider relationships.
IT buyers may think they got a good deal if they get the vendor to come down on price. But that’s almost never the case. In fact, low prices may be a red flag — an indication of hidden costs that will emerge later or under-sizing of the deal by the vendor. “A deal that is priced too low can have greater negative impact than overpaying,” Arora says.
Do your homework
“Consider benchmarks, market norms, and strategy before entering the room for a negotiation,” advises Amy Fong, partner in the sourcing and vendor management group at Everest Group. Price should be part of the pre-negotiation assessment, but not the lead factor.
“Build a holistic service delivery view and consider factors beyond cost such as performance, efficiency, and risk management,” Fong says.
Decide on your negotiation approach
“One of the common complaints is when either party considers the negotiation to be win/lose,” says Arora. “This tends to be driven by a position-based negotiation strategy.”
Taking a unilateral stance to serve your own needs, demanding outcomes, or making ultimatums may simplify the process or speed it up, but it doesn’t foster collaboration. “In fact, it often results in splitting the difference with both parties compromising on benefits,” Arora says.
A more effective approach is interest-based negotiation. “In this framework both parties work to understand the other’s needs, desires, and problems to be solved,” Arora says. “While this extra effort can be difficult to execute – deconstructing and analyzing positions can be complicated and nuanced – the process focuses more on problem solving.”
The result is better value distribution and typically a stronger relationship with the vendor. Seeking mutual gains, agreeing on equitable terms, and executing a balanced contract should be the goal, says Fong.
Look beyond the obvious solutions
IT buyers often end up negotiating a deal as an end unto itself instead of looking more broadly at how to generate business value. For example, they might focus on signing an IaaS deal rather than looking for a reliable platform for running specific software.
Even when negotiation begins in earnest, it pays to set pricing aside at first. “Design the right solution from the business before negotiating the final price,” advises Tanowitz. “Allow the service providers the opportunity to differentiate based on the unique assets or tools or accelerators that they can bring to the operations.”
There may be alternative deal models that make sense. “Buyers should stop running away from more complex commercial models like outcome-based contracts,” says Arora. “Discussing outcome-based contracts with service providers should be a strategic decision, geared toward better business results for both parties.”
Get all-in pricing and press for cost protections
Even as IT leaders take a win-win approach to vendor deal-making, it’s important they protect their interests. That begins with making sure you get “all-in” pricing from vendors to eliminate surprise costs, says Peterson.
Alexander advises pushing for cost protections for deals and renewals. “Some deals that lack such protection have resulted in increases in annual fees between 5% and 20% — sometimes even higher,” Alexander says. “Negotiate caps on renewal increases, reveal and protect against hidden costs, and include flexibility in the pricing model or contract term length.”
Tanowitz also recommends “hard-wiring” any productivity and cost savings improvements in vendor contracts to ensure they are realized.
Take advantage of economic volatility
Macroeconomic dynamics are changing faster than ever and IT leaders should ensure that their deals flex with the times.
“As we move from a hot tech economy to recession, IT leaders have tremendous opportunities to optimize cost through contracting with IT vendors,” says Peterson. “Use an agile approach based on the negotiating leverage you gain in the downturn. Focus negotiating energy to what past downturns have demonstrated are the ‘money points’ in the negotiations while building for the future.”
Have an exit plan
Just like startup founders have a clear exit plan when they launch, so too should CIOs when approaching a vendor contract.
“IT leaders need to have an understanding of what it will take to disentangle themselves from that vendor and, just as importantly, when they can,” says Alexander. “Ensure a smooth transition to another solution by including data extraction and transition assistance in contracts.”