Five tips for negotiating IT support contracts with vendors

With IT budgets slashed, now is the time for vendor negotiation to get the most bang for your contract buck. These five approaches can help lower IT support contract costs.

Perhaps we shouldn’t have let vendors slide by with their expensive support agreements and contract license renewals before the economy went downhill. But times have changed, and reducing IT costs, especially those never-ending support agreements, is now considered a best practice. Now is the time to dissect IT support contracts and strategize with internal business departments for a united team.

At first glance, a vendor contract may not seem negotiable. It’s hard to find ways to dispute high prices. Because there’s only one Microsoft, Hewlett-Packard Co. and Oracle Corp., with little competition for support, a different approach is needed for negotiating. Entering negotiations with a fresh strategy and inviting the vendor to help plan are great ways to reach an agreement on lower pricing. Bringing vendors to contract negotiations early and asking for their help in the growth of their products is an invitation they can’t resist. These five approaches can help in lowering costs of IT support contracts.

Consolidate vendors to gain clout
To accomplish more during negotiations, you can pool all purchasing power for a company rather than scatter it across smaller divisions or departments. But it is also cost effective to consolidate horizontally for more than one product. If we aggregate various products, hardware and software to buy from a single vendor, that sweetens the deal for them.

By treating Dell as a general reseller, for example, you can purchase its servers and desktops and buy software licenses normally from HP and Microsoft, along with security appliances and software. The goal is to buy as much as possible from a single source to drive up total dollars spent with them. Along with streamlining purchasing for all divisions, this creates further discounts and can significantly improve your bottom line.

Look for new competition among third-party vendors
Years after the painful HP/Compaq merger and IBM’s downsizing, a legion of experienced employees was fired. One small company, Systems Maintenance Services Inc. (SMS), was positioned to hire these smart and loyal technicians while maintaining the old hardware still in hospitals, schools and government agencies. SMS is now a viable competitor, existing where no other company has before -- the kind of innovative third-party support needed when planning negotiations with the big guys.

There are some risks in moving to third-party IT support contracts, but they are dealt with by planning and engaging the vendor in your overall support strategy. Finding and using these kinds of competitors is key in getting big cost reductions and buying services that can be modified to fit your needs.

Take advantage of future purchases
Many contracts allow you to make purchases over the period of a year and get the discounts now. If there is any chance of growth in the near future, you’ll save by asking for the price of an entire year’s purchases for every item ordered instead of buying for immediate needs.

Reduce shelfware
How many licenses never go into service and sit on the virtual shelf unused but still paid for? Tracking hundreds of applications across thousands of users with dozens of daily changes requires a small army – and armies are expensive. Building a client management system such as Microsoft’s System Center Configuration Manager will help meter software usage and automatically add or remove software as policy dictates. Using automation to reveal where software is installed, who has access and how many licenses are in use daily can also save.

Engage business
When negotiating IT support contracts with vendors, be sure to involve an IT person that understands the software and a business person that understands your particular contracts. Make sure they talk to each other ahead of time to avoid gaps that vendors could exploit to raise prices. For example, not projecting enough licenses for the year can mean purchasing very expensive add-ons later. The business person knows his purchasing plans and the IT person knows current capacity; therefore, both are needed to project future needs.                                                             

In the end, negotiation is finding common ground where everyone feels comfortable. The best negotiators recognize that a contract is not a competition for the best score, but a way to build on long-term relationships and create a team mentality. It’s important to create that environment ourselves, but it is also something we should expect from our vendors.

On a side note, here are some pricing models to consider in license and IT support contracts

Pay per seat. The traditional pricing model for software. Vendors offer better deals for volume and commitment but can include penalties for lowering the number of seats before the agreed-upon renewal time. Customers can lose their volume discounts if they give back a significant number of seats, and may pay list price for more seats if they underestimated user demand. 

Pay per concurrent online users. Targeted at global companies that have employees working at different times in different locations. In a “follow the sun” scenario, licenses drop at close of business for one location and then are reused in a different continent where dawn breaks. 

Pay for unlimited clients. With this pricing model, there’s no need to keep track of license usage in case of a vendor audit, and it’s useful for public-facing systems or unknown surges in demand. Such licenses are pricey, but can act as a hedge against shortages or big shifts in the market. 

Pay per usage. A new model where vendors charge a baseline fee and scale costs up and down according to utilization of the software or system. This option works when companies have installed real-time tracking and is great for managing costs for monolithic software suites when only a tiny percentage of the features are utilized. Pay per usage allows customers to pay on a highly granular level and not just because an application is launched. It’s also possible to only pay for features or software modules that are used.

This was first published in January 2011

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