The CIO’s guide to smarter vendor negotiation: 10 tips
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.”
