Retaining Power in Cloud and Large IT Contract Renewals

Spend Matters welcomes another guest post by Jeff Muscarella, partner of IT and telecommunications at NPI, a spend management consultancy, focused on eliminating overspending on IT, telecom and shipping.

In talking with numerous IT and sourcing leaders, one thing is consistent, they all dread contract or maintenance renewals with major vendors like Microsoft, Oracle, SFDC, Adobe, IBM, Cisco and many more. In most cases, it’s because they feel as though they have limited options and are at the vendor's mercy. As more IT vendors focus on the siren song of Wall Street – recurring revenue models – they have moved away from highly customizable offerings that allow customers to buy only what they need, when they need it.

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Take Salesforce.com, for example. In a recent Forbes article, CEO Marc Benioff stated, "My dream is crystal clear to be the first and fastest in the cloud to $10 billion in software and then onward." On the company's most recent quarterly call, he told analysts this: "No one at our size and scale is growing at this double-digit rate." The lure of double-digit growth when you're already a $5 billion-a-year company is hard to ignore.

So how can companies respond when vendors like Salesforce.com focus less on what customers need and more on what Wall Street wants? Here are 3 simple steps to help preserve your options and leverage during cloud and other IT renewals:

  • Don't wait for the renewal notice or proposal. Rather than wait for an incumbent vendor to deliver their often "super-sized" proposal for the renewal, proactively take charge of the discussion by setting the stage for the need for a reduction and/or increased discounts. Thinking back to Salesforce.com’s growth aspirations, it's easy to see why sales teams are always pushing the adoption of new products/services, upgrades and price increases. The longer you let a sales team believe this may be a possibility, the more wed they (and their management) become to it, and the harder it becomes to dissuade them of it - no matter what your real needs are.
  • Develop options early. Many of us feel trapped because we’ve standardized on an incumbent vendor. And while this may largely be true, waiting until 1, 2 or 3 months before a renewal to explore options only cements that reality. Every solution has alternatives that can be used for feature, function and pricing comparisons. Budget constraints are also very effective at setting expectations. By beginning any major renewal effort at least 3 to 6 months early, you have the time needed to develop credible options, define a potential rollout strategy and talk about it in enough detail that the vendor knows you've really looked into the alternatives.
  • Approach every deal as though it will be a long-term relationship. We all know to negotiate things like caps maintenance increases and price locks into strategic vendor agreements. But too often, especially in the cloud space, companies approach the initial purchase as a "pilot" before making a larger commitment. This is unfortunate, as it sets the stage for all later negotiations and lets the vendor determine just how valuable their product of service can be before establishing final, longer ranging terms. Right from the get-go, stick to known best practices such as locking in future price discounts, caps on increases, product or license exchange rights (so you can optimize what you do buy later), security and other key terms while they're still willing to make major concessions in order to get in the door.

Managing the value derived from ongoing relationships is difficult in any industry, but it is especially challenging in IT where infrastructure standardization is required, and constantly changing pricing and licensing models provide numerous opportunities for new forms of "vendor lock-in.”

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