Posted by Tom Pohlmann on December 22, 2008
Here’s another follow-up post to the recent jam session on using a down economy as the impetus for making lasting improvements in IT.
One of our calls involved three analysts from the sourcing and vendor management community – John McCarthy, Duncan Jones, and Paul Roehrig – and took on the topic of vendor relationships in software and services, where 82% of our attendees said that the economy is indeed forcing them to put more pressure on IT suppliers. The call’s tone was this: Flogging vendors only hurts the quality of the product or service you receive and bruises relationships. Remember, vendors are in the same economic boat as you.
Here are 5 lessons learned that figured prominently on the call.
1) Lower rates don’t always lead to lower costs.
Asking for price concessions without conceding elsewhere can come back to haunt you. For instance, in labor-intensive deals, asking a provider to cut its rate will only lead to more junior talent being thrown your way. The ability of your provider to get it right the first time also goes out the window. In that example, keeping the price point the same but insisting on more senior talent might be the better play. Other variables that you can balance against lower rates include reduced penalties, additional scope, and contract extensions.
2) Discretionary dollars can be great bargaining tools.
There are other tradeoffs beyond those of price vs. service, and finding them requires an understanding of vendor motives at different levels. Take software, where a sales rep needs license sales to make quota and is less concerned with your wish to reduce maintenance. It’s not always a stalemate. One Forrester client wanted to eliminate maintenance on unused software, but couldn’t get the vendor to agree. When it came time to buy new licenses elsewhere, the customer played that chit and avoided any maintenance increases by, in effect, negotiating a swap of the new maintenance for that of the shelfware.
3) Buyers still don’t pay enough attention to T’s and C’s.
Just when you think you have a great deal, havoc hits thanks to contract flaws, usually in the form of language that is either imprecise or lagging the pace of technology change. For instance, what does the term “used” mean in an environment where one vendor’s interface is accessing another’s functionality? Reopening a past negotiation is one thing, and tough to do unless there’s another transaction on the table with the vendor, but for new software contracts, fight for flex-up and flex-down models that protect future options.
4) There’s no excuse for M&A catching anyone by surprise.
In sectors like outsourcing there has been a steady pace of acquisition and partnering, both of which can be unsettling to clients, but not always a bad thing. Our advice: Plan for the divorce upfront. Sounds crass, but efforts to shorten contracts, create exit plans, and install provisions that terminate a contract at signs of financial trouble, need to become the norm in our industry. In sectors like software, remember that you’re buying into the future of a product. While cash should be viewed as king - especially in volatile markets (see Indian Tier 3 providers) - don’t confuse a vendor who is experiencing temporary cash flow challenges with an inferior or wobbly product.
5) Vendor management functions need to mature, expand scope.
71% of enterprises in North America or Europe either have a central vendor management organization (VMO) or are planning to implement one (up from 52% in 2006.) Increasingly, these groups recognize that having good contracts is one thing; sustaining vendor performance is another. The scope of the VMO needs to expand beyond just striking deals to managing vendor contributions on an ongoing basis, and taking on elements of demand management across the organization, including vendor selection. If nothing else, this creates more leverage toward securing discounts. But as with any scenario that proposes increased reliance on third parties, the VMO had better get its own house in order first, meaning transparency, governance processes, etc.
Sidebar: Check out this report on software licensee bill of rights; a bit of an oldie, but still relevant to this conversation.
Please post your questions or share your own ideas. And have a great holiday season!
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