Your organisation is locked in to a software platform that is crucial to running the business. The costs of migrating to an alternative would be at least three times the current annual maintenance and support costs, not to mention the business risk, user training and all the inconvenience of adapting processes and working methods to the new software. The software vendor knows all of this only too well of course, and has been increasing prices steadily at every contract renewal. As a procurement professional, what levers can you pull?
This software negotiation scenario is not unique to software procurement, but it is certainly a common set of problems faced by software procurement professionals.
I have found that one of the most effective means of maximising software negotiation leverage is by being aware of the software vendor’s financial calendar and timing sensitivities and using this to your advantage. When is their fiscal year end? When are their quarter end dates? These are always when the best deals get done.
Insights into how sales teams function
In 2005, when I was cutting my teeth in the procurement function, I was assigned to work with my company’s sales teams to put in place teaming agreements suppliers for new customer deals. From a procurement perspective, this was a fascinating, area to work in because I was essentially part of the sales team. I learned how time sensitive the sales process was. The attention of the sales people was very much focused on the negotiations that could potentially close during that month or financial quarter. If a potential deal was highlighted in the sales funnel for a particular quarter, then the customer would get the attention of the sales people. Of course, much of this depends on how hungry the sales team is to boost its numbers.
This insight has helped me imagine myself in the shoes of the salesperson I am negotiating with. If you wait until a month before the end of your contract term to start your negotiation, then why would they offer you a better price? You are obligated to reach an agreement regardless of what the conditions are. The earlier you start the more chances you get to cut a better deal. So, find an excuse to start your software negotiation early. Remember that there is no reason to wait. The fact that your maintenance expires at the end of September is no reason that it cannot be extended by a year in March. The supplier will be able to recognise the six months additional revenue in March, and you probably would not actually have to pay for the additional six months in March – merely signing a payment schedule stating the amount you will pay in September will be enough to satisfy the revenue recognition rules of most software vendors.
From the supplier’s point of view this is unexpected additional revenue in March, and many sales people live from quarter to quarter – they are willing to offer additional discounts to book some additional revenue in March rather than wait until September. If you initiate this more than six months in advance of your renewal date (paying attention to the supplier’s financial calendar), then you give yourself two end of quarter opportunities to drive a bargain. And who knows, at the end of one of those quarters the sales person might really need your deal to make his sales target for that quarter.
The offers a supplier makes at such sensitive times (i.e. at the end of a financial quarter) will often be couched in language saying that the pricing is only available until a particular date, and after that it is back to the standard pricing. Treat such statements with a pinch of salt. In software negotiations, once the vendor has made an offer, you should be able to use that offer as the baseline for future negotiations.
Remember that in this type of negotiation the more value you can bring to the table for the supplier, the better the deal you will be able to negotiate. Software vendors love to be able to recognise revenue for future time periods. If the software is going to be part of your IT environment for the foreseeable future, then try to offer the supplier a longer term commitment (3yrs or 5yrs for example). Again, you do not have to pay this upfront; signing a payment schedule is enough for the supplier. If you are going to need professional services from the supplier during the term of the agreement, then include this in the negotiation. Get a pool of consultancy days included in your contract. Try to understand what is important to the supplier and discuss with your business stakeholders to see if you can try to bring additional value to the negotiating table. And do it EARLY.
All contract management tools have contract expiry notification functionality, and you can use this to be notified earlier. If you don’t have contract management software, then even using a spread sheet would work. However advanced your tools are, what matters is setting aside the time to actually do this. Schedule a recurring time period in your calendar to actually email or call your vendors to initiate negotiations in this way. For your low to middle value contract renewals you can work with templates and have administrative staff initiate the process. Simply stating that you are tasked with reducing software costs by a percentage and that you wish to discuss how that might be achieved is a simple and effective conversation starter. The key is starting early.
Image credit: Time for Lunch by David Gallagher, Creative Commons, Flickr.com