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Improve your IT contract negotiations by focusing on 5 factors

 

Pricing and quantity only one aspect of IT contract negotiations

The first obstacle CIOs face in IT contract negotiations is that vendor pricing systems “don’t mean much,” Garrahan said. Three of the top 30 vendors ClearEdge works with, for example, don’t even have list prices. “How do you benchmark something that doesn’t have a price?” Of the remaining vendors, over half have pricing systems that allow for more than 90% off the list price, he said. Others offer over 80% off, and still more will go north of 70% on discounts.

“Add it all up — 90% of the top 30 suppliers have absolutely no pricing integrity. It’s that simple,” Garrahan said. He ran through the discounts from three of the 30 vendors — Nos. 22, 14 and 1 (pictured) — to make his point, comparing costs with their maximum discounts vs. ones that are three percentage points less.

Scoring your SaaS deal

Vendor No. 22, with the lowest discount rate of the three, offers up to 20% off. In a hypothetical purchase of an item list-priced at $100, the 20% discount puts the cost at $80. If the buyer only qualified for a 17% discount, the cost is $83, or a 3.7% difference over the fully discounted price — “not much,” Garrahan said. Vendor No. 14’s discount is up to 75%. The full discount on a $100 item puts the cost at $25; a 72% discount comes out to $28, a 12% price difference. Vendor No. 1’s maximum discount of 92% is in the realm of most vendor discounts, according to Garrahan. The full discount applied to the same hypothetical $100 item comes out to a cost of $8; an 89% discount seems close, but the resulting $11 price is 37.5% higher.

“So, are you fighting for 3.7% or 12% or 37.5%? Having a focus on the P part of our equation can get pretty risky,” he said.

The quantity part of a P x Q approach is not any more straightforward. IT contract negotiations are complex, Garrahan said, due to the “long shelf life of issues” CIOs must consider in order to truly understand what they’re buying.

“Quantity can be many different things over time,” he said.

When figuring out quantity, CIOs must consider explicit risks, such as usage and audit rights, price holds and disaster recovery, as well as implicit risks, such as deployment, security, data control and service levels. At the end of the agreement, there are license rights, maintenance fees, renewal rights and reduction rights to consider.

“That’s why our agreements become complex collections of terms, as we try to predict all the permutations of the risks associated with the investments we’re making,” Garrahan said.

Finally, CIOs also have a “pressing need to satisfy internal stakeholders — the folks that are driving our businesses forward,” Garrahan said. Technology deals must support business objectives and enable corporate strategy. “That urgency is the other major dimension that must be factored into our calculations” when buying technology, he added.

 

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