Historically, it has been common for IT to keep sourcing teams away from IT negotiations, for fear that only those well-versed in this specialist area could understand and successfully negotiate IT requirements.
More recently, however, the landscape has started to change. As IT negotiations gain complexity and more stories spread about failed IT projects, IT teams are becoming more prepared to accept support from procurement, blending commercial negotiation skills with their IT know-how. As the opportunities in IT procurement widen, so our skills and expertise in the area need to increase to leverage them. Although there are fundamental similarities between buying IT and buying any other goods, there are also key differences. Knowledge of these and how to tackle them can mean the difference between a successful negotiation and a very unhappy IT team.
All good negotiations involve a balance of knowledge and a fair market price against the needs of the business. The principal remains the same within IT.
A less lauded ethos within procurement and one that is central to best practice is remembering that it always makes more business sense to build and nurture supplier relationships based on trust and longevity. There is nowhere that this applies more than in IT sourcing contracts, which may run for 10 years or more. If the buyer has concentrated making a big saving at the start, without a thought for the later years, the business is likely to see huge price increases over time as the supplier recoups early losses. Total cost of ownership must be calculated for the life of the contract to keep costs fair & pivotally transparent.
Where contracts do run for many years, such as sourcing deals, there should be break clauses linked to benchmarking. Market review and benchmarking serve as another bulwark to best practice and the only to avoid supplier centricity. Technology changes occur so rapidly now that pricing is quickly out of date, particularly for hardware, so a benchmarking process should be undertaken every two to three years to ensure that pricing remains appropriate. This process is typically undertaken by an external benchmarking company, and the full process with pre-agreed benchmarking company should be written into the contract.
With rapid technology changes and dynamic business needs now commonplace, IT often has to be extremely light on its feet to support these needs, which means that IT contracts need to be able to possess the same agility. When negotiating IT contracts costs should be fully broken down and flexible enough to accommodate change.
When the IT team is pushing hard to start work with a supplier, it’s tempting not to ask too many questions about the total fixed cost that the supplier has presented. But this can hide a myriad of sins, causing costs to spiral as changes occur on the project. The total fee for all services provided should be broken down to show pricing for each activity, mapped against service levels and associated service credits. Service levels should be reported on so that you can manage the supplier’s performance over time. The contract should allow for fluctuation in volume over time, for example in increasing/decreasing license numbers, helpdesk calls, or racks to be managed. There should be pre-agreed day rates set out for ad-hoc work, even if IT denies that there will ever be any other work.
Software systems in particular need prudent up-front negotiation. Once in use, software very often becomes critical to the business and extremely onerous to replace, so the buyer’s negotiating strength dwindles significantly after implementation. Negotiation prior to implementation therefore needs to cover not only the implementation process, but also management of on-going requirements during the life of the contract.
If software is being implemented by the supplier, rather than simply supplied on disk, the payment profile should map to clear implementation milestones, with maintenance payments only starting once the software is in use. This retains supplier focus and accountability throughout the implementation process. Roles and responsibilities between buyer and supplier should be clearly defined-who does what and when- to avoid confusion and/or conflict.
The continuing software contract should allow for changes in user numbers/types over time, perhaps allowing the buyer to shelve unused licenses to reduce maintenance payments later. Any business critical system should also be covered by a robust escrow agreement, ensuring that the up to date source code and any relevant documentation can be accessed by the buyer in the event of supplier bankruptcy. A word of caution however – escrow should be used sparingly, only for critical systems rather than all software, to avoid unnecessary cost. It should also be supported by an internal plan detailing how the source code would be used if required.
Software maintenance agreements are often set up to auto-renew annually. This should be monitored closely and with caution as they are notorious man & money-traps. Many IT teams find that when they come to terminate maintenance, they have missed the notice period cut off date, so have to pay an unwanted year’s maintenance. It is far safer to negotiate auto-termination annually unless renewed. The supplier will usually prompt the buyer for the next year’s maintenance requirements, which gives the buyer a good opportunity for re-negotiation. This re-negotiation is important, as support needs tend to drop over time – support calls will drop as users become proficient in using the software, so support costs should drop in later years as call numbers reduce. There should not be percentage uplift in support costs over years, as is often stated by suppliers, unless this is limited to an economic growth index.
This article summarizes a few of the key considerations for IT contract negotiations, focusing on software and service requirements. There are many more ways in which IT differs from other procurement categories, but IT is clearly an area where procurement can make significant impact by working closely with our IT colleagues as a single negotiating team. There is growing evidence to indicate that including procurement professionals within IT commercial negotiations can reap huge rewards for the buying company.