Planning a purchase from a major IT vendor? In this still-tough economy, negotiating pros recommend being aggressive and creative, as well as analyzing your requirements first so that you don’t buy more than you need and know where you can compromise.
Here are the top tips from consultants who help customers negotiate pricing, terms, and conditions with vendors such as Cisco Systems, EMC, Hewlett-Packard, IBM, Microsoft, Oracle, and SAP. We’ve arranged them in three groups:
Above all, be bold and creative
First, remember that vendors need your money and you don’t have to blindly accept their terms. This may seem obvious, but reminding yourself of this fact will give you the confidence you need to question assumptions and common practices that favour the vendor. The initial negotiation, before you’ve agreed to buy and face the “switching costs” of moving to a competitor, is when you have the greatest leverage over a vendor, says Gartner analyst William Snyder
Hold vendors’ feet to the fire on pricing. This begins, of course, with price. “We’ve let them know that once you get a price, you can’t really go back and increase the price substantially or even really minimally,” says one EMC customer who asked to remain anonymous. “If they try to hook us in with a teaser price and then jack up the price of future capacity … it will be detrimental to their future in our organization — and they know that.”
Propose a deal the sales reps will want to support. Learning how sales reps are compensated can help you sweeten a deal to get the rep on your side and get concessions “you wouldn’t have gotten if the rep hadn’t been really behind the deal,” says Duncan Jones, a principal analyst at Forrester Research. That might mean, for example, buying a comparatively low-cost product or service you can actually use to convince the rep to fight for a better price on another part of the deal.
Negotiate with a senior vendor exec. David Blake, CEO of IT sourcing and commercial advisory firm Upper Edge, recommends forming relationships — and negotiating — with a senior executive at the vendor. This creates a human bond that helps cut through bureaucracy and encourage cooperation, while showing you want a strategic relationship rather than just a transactional relationship when you need a specific product.
Be persistent. Many vendors “are very good at telling people no immediately,” says Blake. “And they’re very good at telling people no three or four times. For certain things, you need to understand it’s the fifth or sixth time … when they finally either say yes or at least compromise.”
Help the vendor do the right thing. Blake also suggests putting your requests in a win-win context. When asking the vendor to lock in price for several years, he suggests, for example, that you mention that the price guarantee will remove one uncertainty from the budget process the next time you go for approval to buy more products from that vendor.
Focus on terms and conditions, not license price. Although many customers focus mostly on the price of what they’re buying today, almost every consultant interviewed by InfoWorld.com said it’s more important to negotiate the right terms and conditions for everything from future purchases to transferability of licenses and how maintenance fees are calculated. “There’s much more money to be saved in optimizing and licensing properly than in negotiating an additional per centage point or two per centage points” on the license cost, says Daryl Ullman, managing consultant at Emerset.
Make your RFP “buyer-biased” to cut haggling. Timothy Nuckles, a principal in Nuckles Law, a technology law firm specializing in IT procurement, sometimes makes his “buyer-biased” terms and conditions part of the request for proposal (RFP) and, thus, a requirement for a vendor to be considered. This cuts haggling time, he says, because once a vendor has been chosen, there “aren’t many terms left to negotiate.” His requirements might include forcing the vendor to fix bugs under warranty rather than under an expensive maintenance agreement, or providing refunds on licenses or maintenance for software that takes longer than expected to deploy. Or he might include clauses specifying the prices at which a customer can upgrade licenses if required by an audit, or the refund a customer will receive if it needs fewer licenses in the future.
Make sure your business partners are covered. Consultants say customers are often stymied by whether and when business partners need licenses to access software customers have purchased. Blake says SAP, for example, doesn’t always “fully disclose and proactively inform the client” that customers or suppliers must be licensed to access the customer’s SAP system, which “is a huge, enormous hidden cost.” An SAP spokesman says its contracts address the issue, while a spokesman for EMC, the only other vendor to address this question, says its sales teams work with customers “to avoid this situation and we do not see this as a notable issue.”
Reject pricey maintenance plans. A growing number of customers are rejecting high-paid maintenance plans altogether, consultants say. This is especially true for older products that don’t need updates or aren’t likely to be updated, as well as software that customers can maintain themselves or for which third parties provide better support at lower cost, says Phara McLachlan, CEO of IT management and consulting firm Animus Solutions.
If you do opt for maintenance, Nuckles recommends negotiating maintenance separately from licenses to assure that you get the best price for both. Yet another option: Buying maintenance only if and when you need it, which “puts the onus on the vendor to keep developing meaningful updates,” McLachlan says. Some vendors are penalizing customers for dropping maintenance, making it another issue you might want to address in your terms and conditions upfront.
Don’t make idle threats. Negotiating hard is one thing; misleading your vendor is another. For example, don’t tell Microsoft you’re considering a move to open source unless you at least have a transition plan or pilot deployment to show you’re serious. “Once Microsoft understands it’s a bluff, it will feel much more secure and confident, and be less ready to discount heavily,” says Ullman. With its software integrated into enterprise ERP, workflow, management, collaboration, and other systems, Microsoft knows replacing it with an open source alternative will be too complex for many customers, he says.
Know thy vendor and thyself Not every term and condition is as critical for every customer and every vendor, which is why it’s so important to understand the vendor, and yourself, before haggling.
Take advantage of vendors’ sales priorities. Over the last year, for example, Microsoft has focused on renewals of enterprise maintenance agreements, says Ullman, cutting prices from its original 25 per cent per year for servers and 29 per cent for applications to a more customary range of 15 to 18 per cent. (A Microsoft spokeswoman said the comparison is not “apples to apples” because maintenance offers from various vendors differ.)
Microsoft also “seems to be pushing its BPOS” (Business Productivity Online Standard Suite), says Blake, while “SAP is continuing to push its Business Objects solution,” and SAP and IBM are promoting use of IBM’s DB2 database with SAP’s ERP suite. When vendors are promoting certain products so heavily, they’re more apt to be flexible on terms and price.
The art of a long-term commitment. Making a long-term commitment by prioritizing a vendor’s products in your architecture can reduce the upfront price, but it also means that vendor will be harder to replace in the future. By linking its products to other widely used enterprise software and by adding new capabilities, Microsoft has managed to make its software harder to replace by customers, and thus boosted its list and street prices despite the downturn, says Ullman.
Many customers buy licenses years before they will use them to get an 80 or 90 per cent volume discount, but they end up spending more than the savings on maintenance fees for what is merely shelfware. Knowing your needs upfront helps avoid that mistake, and it lets you sweeten the deal with products or services you can actually use. Be sure to share these details with the procurement staff that negotiates the deal, says McLachlan, so they don’t just opt for the upfront discount.
A vendor’s culture affects the possible deal. The vendor’s culture also affects the bargaining process. Although in the last two years Microsoft has become much more flexible in accommodating buyers’ needs, SAP and Oracle “have held their ground,” says Nuckles, and IBM and HP “are trying to be more receptive to different ideas about contracting,” he says.
Oracle has an aggressive, sales-oriented culture and a large, expensive product set that can get multiple competing salespeople involved in a deal, says Eliot Colon, president of Miro Consulting. Yet smart customers can get a better deal from Oracle than other vendors because it is more flexible on terms such as limited-use licenses for peak periods, he says. An Oracle consulting partner who declined to be identified said Oracle discounts applications up to 65 per cent off list and its database up to 35 per cent, but it does not discount support. (Oracle declined comment.)
The anonymous EMC customer said EMC has done much in the last few years to ditch the “used car salesman” approach and has “generally removed price as a reason to look elsewhere.” EMC understands that “customers are looking for value in their IT investments, and we work with them to ensure that they purchase the right products to meet their needs,” a spokesman says.
Some vendors are more consistent than others in price and license terms, which helps determine how flexible a sales rep can be. SAP has the most defined and well-enforced policies, followed by Microsoft and Oracle, says Ullman
Tricks the vendor might try to pull on you You may be looking for a better deal because of the tough economy — but so are the vendors who are trying to preserve income and even grow despite the tough times. Many will play hardball as well, and a few will go beyond tough negotiations to underhanded techniques. Be sure to ask these key questions to avoid both inadvertent and intentional unpleasant surprises.
Which agreement is real? “Some companies are real slimy about putting terms and conditions in the purchase order” that may override the master services agreement you negotiated, says Tony Greenberg, CEO of RampRate, a sourcing advisory firm. Not all vendors regularly steer users to the corporate agreement that contains the conditions most favourable to the customer, notes Miro Consulting’s Colon.
How does virtualization affect licensing? Virtualization helps companies save money and boost agility by letting them move virtual machines within pools of hardware. But if a vendor requires a separate license for every server, processor, or even processor core, licensing costs can skyrocket.
Colon says that for two years customers have tried and failed to push Oracle away from per-core licensing. By contrast, Ullman says Microsoft has “a very good set of licensing rules for virtualization for Windows, and is slowly but surely adding licensing options for additional products,” such as its management software and SQL Server database.
When dealing with IBM, the quality of your relationship with the sales rep determines the amount and quality of information you get about its virtualization licensing, says McLachan.
The situation is murkier at other vendors, including EMC and SAP, as the companies work out their virtualization licensing models, the companies admit. So you may find clarity in some products but not in others. For example, “at EMC, we have specific versions of our non-array-based software” designed and priced” for virtual environments,” says a spokesman; “we are working to assign licensing metrics that reflect the value that EMC software delivers to customers.”
Related story: Virtualization checklist for SMBs
Are you locked in to a cloud? Blake says pricing models for cloud services and SaaS (software as a service) are becoming more complex and sometimes violate the cloud’s “pay as you go” promise by requiring a multiyear commitment to get lower prices. (InfoWorld executive editor Galen Gruman reports he’s increasingly hearing complaints from CIOs that Salesforce.com’s pricing is designed to discourage pay-as-you-go, flexible use in favour of multiyear contracts, for example, that end up making Salesforce.com’s value no different that traditional enterprise software vendors.) Some cloud and SaaS vendors also don’t reduce the customer’s costs if their usage drops below an agreed-upon level, Blake says.
Are vendor audits just fishing for revenue? Software audits can be a legitimate attempt by the vendor to protect their interests — or to extract more money during tough times. Compliance teams often “overzealously pursue their own revenue targets outside of the main account team’s control,” even if it harms the vendor’s long-term relationship with the customer, wrote Forrester’s Jones in a January 2009 report.
Related story:7 business negotiation tactics from the FBI
According to an informal survey of 60 customers conducted in August by Martin Thompson, editor of the IT Asset Management Review, 78 per cent of respondents had experienced an audit in the last year, with Adobe Systems, IBM, Microsoft, Oracle, and SAP most active.
If a vendor’s sales team launches an informal audit, says Colon, ask why it is looking for the information. If it turns out it suspects you are underlicensed, use that information to bargain for a better price on the additional licenses, rather than turning over all your usage information so that the rep can look for possible violations, he says. If you must undergo the time and trouble of supplying information, make sure you get a clean bill of health at the end.
The best protection against audits, consultants agree, is a strong asset management program that ensures compliance or at least gives you evidence to defend yourself. (Microsoft, says Thompson, has done more than other vendors to promote software asset management to help customers stay in compliance.)
Is vendor financing just a trick to increase your costs? Vendor financing, with the backloading of some payments until a later time, may be attractive but watch out that the vendor doesn’t calculate your maintenance fee as a portion of the larger, back-end payment rather than as your lower, regular payment, warns Snyder. That type of calculation can raise your costs unexpectedly.
The bottom line: Negotiate
Despite the shaky economic recovery, consultants say it’s still mostly a buyer’s market, with vendors competing for your IT dollar. Use the uncertain economy — and the knowledge that vendors need your dollars — to drive smart deals based on a clear-eyed knowledge of your real needs.
Grab a chance to win a $500 cash prize. Take part in IT World Canada’s 2010 Business Communications Survey