The time to renegotiate a contract with one of your leading software suppliers is approaching. What does your organization need to do to prepare, conduct the negotiation discussions and close a solid agreement? There should be a methodical approach to contract negotiations to ensure the best preparation and most favorable outcome for your organization.
Let’s review our top ten tips and techniques that will help your organization improve its contract negotiation process.
1: Allow Enough Lead Time
Software publishers try to initiate the negotiation process with their customers well in advance, as they are anticipating the incremental revenue. While organizations may realize the renegotiation date is looming in the future, they tend to become bogged down with the immediate priorities of their daily responsibilities, and postpone the necessary planning and preparation. In order to allow enough lead time, preparations for any negotiation should begin 4-9 months in advance of the contract requirement, whether it is a new agreement or a renewal. This lead time will enable you to gain an understanding of your current compliance position and future requirements, so that you will enter into the negotiations in a position of knowledge and power.
2: Assemble your Team
The first step in the process is to assemble your team. Your team should consist of IT leaders who understand the requirements of the company, IT sourcing, vendor management, finance, contract management and legal counsel. The team will provide input during the process; however, seats at the negotiating table should be limited to the fewest number of people required. There should always be a single negotiator or voice, while everyone else plays a supporting role.
3: Know Vendor and Agreements
It is very important to have in-depth knowledge of your vendor in terms of their internal goals and how they operate. Do you know their revenue targets with respect to your agreement? Do you understand how they approach negotiations? You must also understand every aspect of your current Master Agreement, Services Agreement, Warranty, Support and other Purchase Agreements. Contract specialists with a solid understanding of terms and conditions should be an integral part of your team.
4: Build your Requirements
In order to build your requirements for new software licenses, you must first know where you stand in terms of current compliance position with the publisher with whom you will be negotiating – which software licenses you are currently entitled to and how many are currently deployed in the environment. It is important to have this baseline information so that you build your future requirements accurately. Collect input from the leaders of the business units to understand their future requirements and compare this information with the current entitlements to determine if there are still software licenses available that do not need to be included in a new agreement.
5: Establish Favorable Logistics
The logistics in a negotiation can have an impact on outcome. When conducting negotiation meetings with your supplier, make sure they take place in-person and on your company property. This enables you to observe the expressions on the vendor representatives’ faces as well as their body language so that you witness their reaction to the discussion, which in turn can reveal valuable information about their negotiating objectives, strategy and tactics. This set up also enables you to maintain control over the meeting environment.
6: Contract/Negotiation Term-Sheet
Prior to the first negotiation meeting, develop an internal contract or negotiation “term-sheet” that clearly defines your requirements, to include:
- Business unit requirements
- Professional Services requirements
- Financial terms (i.e. purchase, lease, rent or other options, CAPEX and OPEX splits)
- Business terms
- License or products terms
- Contractual or legal terms
- Vendor commitments required during negotiation
- Vendor scorecard
- Major business disruptions or issues during the current contract term
Establish internal meetings to review your “term-sheet” with legal, sourcing/procurement and IT business leaders.
7: Identify Costs and Deliverables
It is important to identify all the costs and deliverables associated with the new agreement, in detail. These may include:
- Initial costs
- Maintenance and ongoing support costs
- Application implementation support
- Technical support
8: Create a Competitive Landscape
You don’t want your supplier to believe that they are the only game in town. Make your vendor aware that they have a credible competitor, but do not let on who it is. Use competitive comparisons, ideally by negotiating with two credible vendors.
You can use a number of competitive arguments in the negotiation process, such as revealing that the competitor provides the following:
- Better fit, so less tailoring (enhanced functions added at their expense)
- Easier integration (to get more help)
- Less risk (to get more guarantees/help)
- Better price (if you are looking for a discount)
If your supplier believes there is stiff competition, they will likely return to the negotiation table with an improved counter proposal.
9: Establish Future Terms
Once your supplier has provided a proposed contract, make sure you read the language very carefully. Ensure that it is “future-proof:”
- What happens if our company changes, grows or shrinks?
- What happens if the supplier changes, grows, shrinks or disappears?
- What if the technology changes?
- What if the project is delayed, changed or scrapped?
10: Treat Vendor as a Partner
Finally, never damage or hurt the vendor relationship during the negotiation process. It’s okay to be strong in your negotiations, but never use tactics that cause long-term harm. After the agreement is inked, you need to maintain a positive working relationship with your supplier. If both you and your supplier view each other as partners, then this will create a win-win scenario for both parties.
Additionally, always tell the truth during the negotiation. You can keep some information internal, but never lie. It will only hurt your company’s brand or image, and destroy your professional standing.
Whether you are working on a new contract or a renewal, follow these top ten techniques as you prepare and conduct your contract negotiations. The result will be more favorable agreements for your organization, now and over time.