Rework vendor contracts to save money in tough times

Saving money is of paramount importance for CIOs in today’s economy, and renegotiating contracts with IT vendors may be one of the best ways to chop expenses.

Convincing vendors to lower prices when you have a signed contract is a difficult process that takes some savvy negotiating skills.  Nevertheless, some CIOs are reporting success. Six out of ten CIOs are trying to lower costs in 2009 by renegotiating IT vendor contracts, a September survey of 50 CIOs by the CIO Executive Board found.

It may seem hard to believe a vendor would give up revenue willingly. “They can be fairly contentious discussions,” AMR Research analyst David Brown says.

One technology executive, however, explains that competition gives leverage even to user organizations bound to an IT vendor by contract.

“The leverage I have is that at some point, that contract is going to come to an end, and I’m going to be more likely to switch vendors when someone is not willing to be flexible,” says Thomas Catalini, a member of the Society for Information Management (SIM) and vice president of technology at insurance brokerage William Gallagher Associates in Boston.

The brokerage is trying to renegotiate about a dozen contracts with IT vendors including telecom, outsourcing and maintenance companies, Catalini says. Salespeople are under pressure to record sales in 2008, so there’s also an opportunity to get larger-than-usual discounts if an enterprise is willing to buy a product earlier than it had planned, he says.

With a signed contract, a customer typically has to give up something to get a discount. This often means extending the contract in exchange for lowering the annual fees. Simonds International in Fitchburg, Mass., has achieved significant cost savings by renegotiating contracts with disaster-recovery, ERP, phone and WAN vendors, says CIO Susan Kifer.

Key in her negotiations is honesty, Kifer, who also is a SIM member, says. The cutting-tool manufacturer is struggling because of the declining housing market, a fact she is quick to point out to vendors.

“Everyone understands what’s going on in the housing market. We need to lower our costs in order to remain viable. For us, that’s an honest statement,” she says.

Simonds had a three-year contract for a robust high availability disaster recovery service that cost US$60,000 a year. About a year ago, “the vendor worked with me to provide a backup service that was not [high availability] but was adequate and lowered our cost to $30,000 for the remaining two years of the contract,” Kifer says. The vendor was flexible in part because it also sells servers to Simonds and wants to maintain a strong relationship, she says.

Kifer also targeted ERP annual licensing, negotiating about a 10% discount in exchange for a three-year contract renewal. That was about two and a half years ago and she now is renegotiating again, she says.

With Simonds’ phone and WAN vendor, Kifer renegotiated with about six months left on the contract. She went through a full RFP, competitive-bid process, which helped convince the existing vendor to lower pricing. “Not everybody’s willing to [renegotiate],” she says. “We have found if we have a longstanding relationship [with a vendor] they have been willing to help us through.”

Vendors won’t make it easy

Despite Kifer’s success, renegotiating contracts is extremely difficult, Gartner analyst Jane Disbrow says.

“I cover Oracle and SAP. Both of those companies are very, very difficult to deal with when it comes to taking partial licenses off the board, she says. “They fight very hard against customers coming back and trying to reduce maintenance and support. It used to be you could just drop support.”

A decade ago, dropping support for a particular product was as simple as writing a letter, Disbrow says. Today vendors are more likely to take an all-or-nothing stance. If you have bought five products from a vendor and want to drop support on one, the vendor will insist that you either maintain support on all five or stop getting support entirely, she says.

This makes it difficult to get rid of ongoing costs related to shelfware.

“A lot of these companies have ended up with shelfware, products they’ve never used and never put into production,” she says. “The vendors are just not cooperating.”

IBM is wary of renegotiating existing contracts with customers, says that company’s software chief Steve Mills. “In general, no,” he says when asked if IBM is willing to renegotiate contracts. “But you have to get down to the specifics of what the client situation is.”

If customers say a product is not working out, IBM tries to help them make better use of the technology, or use it in a different way to gain more value from it, Mills says.

“Our response is not ‘let’s lower your bill.’ It’s ‘let us come up with more creative ways to use the equipment we have,'” he says. “We’re not inflexible in that context but we’re also not giving customers their money back.”

Mills says he hasn’t noticed any increase in customers wanting to renegotiate contracts.

Today’s economic conditions could make it harder to renegotiate signed deals, but customers looking to spend new money should be able to get a great price, Gartner’s Disbrow says. “Certainly it is a buyer’s market. If you’re negotiating a new deal, credible competition is your primary leverage,” she says. “Right now, Oracle and SAP can’t stand each other. They’ll discount tremendously to keep the other company from winning that deal.”

Some users, such as Simonds’ Kifer and William Gallagher’s Catalani, negotiate contracts on their own, but enterprises also can hire expert negotiators to help them through the process. Illinois attorney Sam Conforti, for example, negotiates contracts and writes a blog on software licensing. The ability to renegotiate software maintenance and support fees has been hindered by vendors not offering the option to “park users,” he says.

ERP vendors, for example, used to allow customers to reduce their user counts for specified periods of time, usually not more than 12 to 24 months, Conforti says. This occasionally was done in the early part of this decade, but is not an option with ERP vendors today, he says.

“Looking forward, we could ponder if such a mechanism will be allowed again by the ERP vendors,” Conforti writes in an e-mail. “This may depend on how bad the economic conditions are and how long they persist. 

The original intent was to temporarily help out a customer experiencing significant economic hardship, not to allow a revolving door for ERP customers to turn users on and off during normal seasonal or business-cycle downturns. Will ERP vendors need to resort to such mechanisms? Only time will tell.”

Give-and-take required

In a worsening economy, it appears some customers are taking longer to pay money they owe from contracts negotiated in better financial times.

CRM vendor RightNow Technologies, for example, recently reported losing revenue because of “lengthening of payment terms and slower cash collections,” according to Goldman Sachs.

Contracts typically have cash penalties for non-payment, AMR’s Brown notes. Getting relief from expensive contracts is particularly tough for small customers. If you lack clout, have signed an ironclad contract and don’t have a great relationship with the vendor, “you could end up yelling at each other and that’s the end of it,” he says.
The key for customers is to call the vendor, state your case in business terms and act professional, Brown says. There has to be some give-and-take, with each side giving up something. “This is about business. This isn’t personal. Where people get into trouble is they make it personal,” he says.

In today’s economy, many vendors are ready to be flexible, Catalini says. “The good ones are expecting my call,” he says. “They’re prepared for the discussion, they are willing to be flexible and act as my partner.”

On the other hand, “I’ve had some that are not really offering a lot of flexibility. We don’t necessarily have a lot of leverage in those cases,” he says.

If dropping support for a product is an option, sometimes it’s worth the risk, Kifer says. “I self-provide a spare router for example and don’t pay maintenance on my other remote-site routers. We can get them back up and running next day, and we’ve decided that is good enough,” she says.

“We also dropped maintenance on some equipment that is stable and maintenance cost is too high to justify — VoIP phones, for example. They are durable and not worth paying maintenance on each device.”

Saving money is top-of-mind for most IT executives these days. In fact, six out of ten CIOs are trying to lower costs in 2009 by renegotiating IT vendor contracts, according to a survey by the CIO Executive Board. Here are some quick tips, culled from our discussions with senior IT leaders, for saving money on technology contracts.

1. Even if you’re bound by a signed contract, remember that you have leverage. The contract will end eventually, and vendors know you’ll be less likely to renew if they aren’t cooperative during the length of the contract.

2. Negotiations can be contentious, but they don’t have to be. Be professional and explain your business problems and the reasons your organization needs better pricing.

3. Be flexible. Vendors usually aren’t willing to cut prices unless there’s something in it for them — such as a contract extension.

4. If a contract is set to expire in six months or less, gather formal bids from other vendors. Then either switch vendors to get a better deal or use the bids to convince your existing vendor to lower its prices.

5. For new contracts, negotiate terms and conditions that give you the right to drop or reduce support; these will allow you to lower costs later.

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