Negotiating with software, SaaS and hosting vendors is a leverage game. Market leaders like Microsoft, Oracle, IBM, Adobe and SAP know this. Those vendors have structured their sales processes to maximize their ability to exert control over the negotiations framework and, thereby, to dictate the terms of their transactions.
However, it is possible to push back. Here are the most important tactics that companies seeking to invest in those vendors’ products and services can employ to maximize their own leverage and to succeed in obtaining better commercial and legal terms:
The single most important thing that a company can do to improve its negotiating position is to bring money to the table and to be in a position to walk away with that money if a vendor is being unreasonable. That point may seem obvious and possibly a little facile, in that money is a finite resource that a company cannot simply materialize for purposes of a negotiation. However, our experience is that many companies fail to take advantage of their own bargaining power through inadequate planning and a failure to look at a vendor relationship both holistically and in relation to other opportunities.
For example, it is fairly common for a relationship with a vendor to have evolved over a series of unrelated transactions over many years. Individually, none those transactions may represent substantial negotiating leverage. However, in the aggregate, those deals may entail substantial, ongoing revenue for the vendor, making the relationship a strategic one for the vendor. In those circumstances, it could make sense to consider early renewals for some of those positions in order to bundle them into a single deal – perhaps coupled with new investments in additional products or services – in order to align the scope of the deal with the scope of the relationship.
In addition, even if a particular vendor relationship is long-standing and seems to be stable, we recommend regularly evaluating competing offerings from other vendors – inclusive of the estimated switching costs to transition to those vendors – so that there always is an alternative to proceeding with renewal of the existing vendor relationship. Especially with hosted solutions, vendors typically work hard to make it as painful as possible to move to a competitor. While some of that leverage can (and should) be mitigated when negotiating the legal terms governing those relationships, having a Plan B available to execute can be an invaluable shield against a bully vendor.
Finally, keep in mind that many vendors may value certain product/service offerings over others, and they may be incentivized to offer better financial or legal terms in connection with their current sales priorities. It pays to be aware of those priorities. For example, if a company is considering a migration of its on-site database servers to a vendor’s cloud (e.g., in the case of Microsoft, moving local SQL Server instances to Azure), then requesting a proposal entailing that high-value cloud revenue (while, again, being ready to walk away from it) could put the company in a much better position than simply requesting a support renewal for the on-premise licensing.
One of the most common tactics that vendors employ to control deal outcomes is the artificial (and unnecessary) emergency. When a customer waits until the month or two preceding a contract expiration, the vendor is gifted with a heavy cudgel to offer its proposal on a “take-it-or-leave-it” basis. Alternatively, the vendor may have a natural, internal incentive to offer better terms at different times during the year. Companies with mature and pro-active procurement practices avoid the pitfalls and take advantage of opportunities related to deal timing.
First, all critical IT contract expiration dates need to be calendared, and a company’s playbook should include an internal review of each vendor relationship at least six months prior to that relationship’s expiration or renewal date. Following that internal review – to include a consideration of other, potential deals with that vendor, competing alternatives, and the company’s compliance status (as suggested below) – the goal should be to engage with the vendor as early as possible in advance of that expiration or renewal date, preferably at least three months in advance. In our experience, especially of larger deals, anything less than three months cedes too much to the vendor when it comes to timing.
Next, a company should be aware of a vendor’s fiscal year. Oracle’s ends in May. Microsoft’s ends in June. Where it is feasible to initiate negotiations in advance of those dates, as opposed to the contract expiration/renewal date, doing so can substantially turn the tables on the vendor when it comes to leverage. That kind of a positional change can result in material savings over the course of the next renewal term.
Finally, circumstances external to a vendor relationship also can have a big impact on the urgency of a deal. A company obviously may not have much visibility into such factors that may be affecting a vendor, but it makes sense to consult with internal legal teams in advance of strategic negotiations to ensure that there are no foreseeable corporate transactions, financial audits or other factors that could negatively impact those discussions.
Finally, almost all IT vendors use audits as revenue generating machines. The single, greatest weapon that a vendor can bring to bear in any negotiation is the threat of license termination and/or legal action arising from non-compliance discovered during the course of an audit. Companies that find themselves in that position may still be able to mitigate the damage (especially to the extent that they can come to the table with an offer of new business (see point #1, above), there often is little that they can do in order to walk away from the negotiations feeling good about the outcome.
For that reason, it is critical from the outset of an audit to ensure that all team members assigned to a compliance review are mindful of the fact that a deal may need to be negotiated upon its conclusion. This means taking a structured and disciplined approach to interacting with auditors and responding to their requests. It means internally identifying risk areas early in order to determine whether it may be possible to mitigate those risks. Where exposure seems likely, it means formulating proposals for alternative products or services that may represent more value to the company than a purchase of additional licensing that may not really be needed prospectively.
In addition, it also is critical for a company to remember that prevention is worth far more than any cure when it comes to audits. While a proactive, internal software asset management (SAM) initiative may represent an apparently expensive allocation of company resources. However, it is one that can pay dividends when it comes to audit exposure and also when it comes to having a thorough understanding of a company’s actual licensing needs. In particular, that kind of information can allow a company to reduce expenditures on solutions or features that may no longer be needed, and it can help to alleviate anxiety over reducing expenditures with a jilted vendor (since many vendors are inclined to initiate audits following transactions that don’t align with their expectations).
We regularly work with our clients to explore these concepts in the context of IT transactions, and we encourage all companies to utilize them to improve the outcomes of their deals.