Affordable IT: Negotiating IT Contracts

Never Negotiate Alone

If there's one thing IT professionals have learned about purchasing, it's that there's safety in numbers. Just as a vendor has a sales team, an IT organization needs a negotiation team--stacked with those who know how to work a good deal--and spot a bad one.

When it comes to negotiating a large or long-term contract, a legal adviser is crucial. In large organizations, a member of the legal department may be available to participate in the negotiations; in smaller companies, a third-party counsel should look over any contract before it's signed. The legal counsel can identify potential problems in the fine print and ensure that you have clearly stated what's expected of the vendor.

Most large companies also have the advantage of a purchasing department that can help research alternatives, negotiate contracts and establish long-term relationships with vendors. Although some IT people are wary of including the nontechnical purchasing department during the product evaluation process, remember that for purchasing professionals, negotiation is part of the job. Even in smaller companies that don't have a purchasing department per se, it's often advantageous to bring along an individual who may be familiar with the company's usual negotiating procedure and have some suggestions for gaining leverage with vendors.In the case of employee- or customer-facing technologies, such as software and client devices, the negotiation team should include a business-unit manager or another individual who can speak to the end user's needs. Some concessions in functionality, price or terms usually are necessary. For example, some enterprises might prefer to give up a higher level of service to get a lower price. With a clear understanding of how individuals will use the technology, this person can help separate the "deal breakers" from the "nice to haves" in a negotiation.

Once you have your team assembled, hold a brainstorming session before meeting with your vendor counterparts, advises Marty Latz, a negotiation consultant and author of Gain the Edge! Negotiating To Get What You Want (St. Martin's Press, 2004). Such a session can help the team identify potential roadblocks and come up with creative ways to solve them. It also gives you a chance to vet the team's idea from a technological perspective, so negotiations won't go in a direction that's not technically feasible.

Don't Trust--Verify

Many bad experiences in negotiations can be traced to the buyer's inability to verify vendor claims prior to making a purchase. Every negotiation should include "a letter of intent outlining exactly how you intend to use the products/services, along with a vendor response that the stated contract will meet those needs," says Jack Pond, CIO for Montgomery County, Pa.

"The hardest part of negotiating a deal with an IT vendor is gaining assurance that the purchase will work as stated," says another IT executive in the software industry. "You need to test, verify or gain details of the product's usage in an environment that's identical to yours, and that can be difficult, because most vendors are not willing to let the customer try before they buy."Before the negotiation starts, users should research the product and its viability for their application. This may include lab testing, visiting other users of the product or setting up pilot networks.

Many vendors offer their own labs for testing, but such environments are designed to optimize the product's performance and may not represent the real user world. Independent labs, such as the ones operated by Network Computing, offer an unbiased environment, but may not reflect the idiosyncrasies of the user's industry or applications. Customer references are a good source of real-world data, but since the vendor usually provides these, they reflect positive user experiences. A pilot network or trial on your own premises is an ideal test, but even then, it's difficult to anticipate every potential pitfall when the new product or service goes into production.

Bottom line: Even though you've gone through due diligence to verify a vendor's claims, you must define your requirements and state how the vendor will meet them. Negotiation experts say the most common cause of a breakdown in negotiations--or in a contract--is the failure of one or both sides to define their end of the deal clearly.

As you begin negotiations with your vendor, it's important to remember that you come from different worlds and may not speak the same language. The hardest part of negotiating a deal with an IT vendor is "identifying all of the unsaid assumptions--from both sides of the conversation--and reconciling them," says Matthew Sabin, telecommunications supervisor at Radio Frequency Systems, a manufacturer of antenna equipment. Vendors have different definitions for words, such as stable, simple and inexpensive, so try to define those terms early on.

Interestingly, sales executives sometimes make similar complaints about their customers. A source who previously served as vice president of sales for two large telecommunications equipment manufacturers offers an insider's view on the vendor-negotiation process and some insights on how to make a deal:"The goal of the negotiation is to clearly define what's included, what isn't included and the price," he says. "Many customers try to expand the scope of work that was defined in the original proposal, whereas the sales team's job is to try to restrict it."

Defining the scope of the deal is often more difficult than the buyer or seller expect. In the case of hardware, this includes not only the product specifications, but also the cost of training, the terms of service and/or warranties, and the cost of any professional services required to integrate the equipment into an existing environment. For software, the agreement should define the license cost and the costs of support, training, patches/upgrades and professional services associated with implementation, integration or customization.

Service contracts can be even trickier. When purchasing services, the negotiators must lock down the scope of the service and its costs, and the performance levels to be met by the provider. Pond says that some service providers might consider customers trained if they have completed the vendor's three-day training session. But an intelligent enterprise will insist on a training agreement that forces the provider to prove that the trainees can perform the functions they have learned, he says.

"If your vendor is not willing to negotiate performance-based standards, you're probably talking to a snake oil salesman," Pond says.

All the requirements, as well as the vendor's plans to meet them, must be in writing, Pond warns. "Assurances from a salesperson aren't worth the air they pollute if you don't have them in at least an electronic--and preferably written--form," he says. "If they're willing to make an assertion, they should be willing to write it down--ask them to do so immediately."Contrarian Lessons

Most IT professionals are not as skilled in negotiations as their vendor counterparts, but don't be intimidated. If you've defined the deal carefully in the first phase, you're on an equal footing with your vendor. Now you're both looking to define a price and terms that are favorable to your respective organizations. Making the best deal, however, means learning a few lessons that may run contrary to conventional buyer wisdom.

Lesson 1: There are no "winners" in an IT technology negotiation. When you're making a one-time purchase at a garage sale, you or the seller might be tempted to take advantage of the other. But with IT technology, the buyer and seller must live together after the deal, so it doesn't make sense to try to "beat" anyone in the negotiation.

"You want to negotiate a great price, without causing the vendor to be resentful that it gave the farm away, which can result in lackluster post-sales support," says Scott Shulman, who knows something about keeping farms--he's the IT manager for Roseville Farms, one of the largest growers of clematis plants in the country.

Montgomery County's Pond agrees. "In the long run, especially with technology, you'll only be happy if both you and your vendor are happy. Like sullen teenagers, sullen vendors are difficult, tiresome and prone to poor productivity, accuracy and results."James Sherburne, director of technology for Manton Consolidated Schools in Minnesota, says that deliberations can go smoothly if you establish an early partnership. "These up-front negotiations set the tone that you are offering the vendor the opportunity to have you as an exclusive customer for the long term," he says, "If they don't warm up to that idea, the meeting is over."

» Lesson 2: The sales rep doesn't set the price. Particularly in large, customized deals, many IT professionals believe they can "talk the sales rep down" on price, as at a used car lot. But according to our former VP of sales, a single sales rep isn't empowered to haggle very much.

"For most vendors, the largest customers get the biggest discounts, period," he says. "The salesperson has very little control over the price. Especially when you're talking about large discounts--40 percent to 50 percent--sales management will usually have the last say, and sometimes even they need corporate approvals."

Most established IT vendors have a fixed sales process and a set range of prices for their products, even in highly customized environments, the former VP says. If they can't make a profit on the deal, they will walk away. "Start-ups and vendors in trouble will do some crazy things to get the deal," he says, but users should be prepared to lie in the bed they make with such vendors.

» Lesson 3: There's more to a deal than the initial sale. Some enterprises are drawn into a deal by a low sticker price, only to find that the cost of support and ancillary technology far outweighs the sticker savings. The flip side is that many vendors are willing to cut their initial sales prices to generate more revenue over the life of the product. In fact, according to the former VP of sales, some sales reps receive the same commissions for selling warranties or services as they receive for selling the main product.Enterprises can take advantage of this "bigger picture" view to reach the deal that works best for their budgets. If near-term spending is restricted, many vendors will slash the initial price and "backload" the contract to realize a profit over a longer term. At the end of a fiscal year, some IT departments with excess unspent budgets may choose to "frontload" their contracts, paying for longer-term services or add-on technology in advance.

Although many negotiators are taught to be hard-nosed and stubborn, most IT executives say they have gotten further with their vendors by showing some flexibility in the services they receive, the prices they pay, or even the terms for financing and paying the bill. In each negotiation, choose your battles--the deal breakers--but be willing to concede some minor points to give your vendor a deal it can live with.

Once the vendor has defined how it will meet your requirements and you've negotiated the terms and price, it's time to review all contingencies. What if the product doesn't do what the vendor says it will do? What if the vendor doesn't provide adequate support? What if the services don't measure up to promised performance levels? As with a prenuptial agreement, you should include some level of self-preservation in the contract--and hope you'll never have to use it.

Although most loopholes are more legal than technical, there are some common mistakes IT professionals make during the final stages of writing the contract. The most critical error is a failure to specifically define the vendor's thresholds for performance and the required response time in the event of a problem. For example, there's a big difference between requiring the vendor to "respond" within three hours and requiring the vendor to "repair the problem" within three hours. Both parties should be clear on the language surrounding support and maintenance of the technology.

Just as important, the contract should define penalties the vendor must pay for nonperformance--and any incentives for performance that's better than expected. SLAs (service-level agreements) are effective in motivating vendors to meet their commitments, but remember that a 10 percent refund is not much help when a critical application melts down and sends the entire organization offline. Some IT managers feel it's more effective to include an escape clause in their contracts that lets them change vendors or service providers if they are not satisfied with performance. In any case, a contract's "protection" is financial, not technological; even the most airtight contract is no substitute for a product with a proven track record of reliability--and a vendor with a proven reputation for customer service.Create a Living Document

OK, you've negotiated the best deal you can. The business units have approved it, the lawyer has perused it, and you've covered every contingency you can imagine. The smiling sales rep hands you the pen, and you finally sign on the dotted line. You've now sold your soul and you're done, right?

Wrong. Unlike those soul-stealing deals with that pitchfork guy, the contract you've signed with your vendor can be changed if it is written correctly. In fact, many agreements, such as those signed with network service providers, are reviewed regularly in hopes that your usage patterns will merit an "upgrade" to a higher value product, such as a higher bandwidth service or a larger software license. Most vendors are thrilled to rework a contract if it means additional business.

Monitor the contract yourself. In most cases, there's a service or support element involved, and vendors should be held to their performance/response time guarantees beyond the initial implementation period. If your vendor is not providing adequate service, if the product is not operating as promised, or if your usage is not as high as anticipated, you may receive a partial refund or switch to another product or service. As long as your initial contract is created with some flexibility, you can make changes as needed.

After all this negotiation, will you have regrets? Maybe. The Forrester study suggests that many IT executives still feel dissatisfied with the price they've paid, even after making a deal. Our interviews for this story turned up many IT people who feel they have been fleeced in the past, and for many of them, it probably won't be the last time. The nature of new technology means that there is usually a level of risk associated with each new purchase. Still, if you've taken care while writing your deal, you can still sign that contract with confidence--knowing that you can always renegotiate.Tim Wilson is Network Computing's editor, business technology. His background includes four years as an IT industry analyst and more than 14 years as a journalist specializing in networking technology. Write to him at [email protected].

We negotiate constantly in our everyday lives with co-workers, spouses and kids. But there's a big difference between deciding who washes the dishes and negotiating a service contract for your company's infrastructure gear. In this Affordable IT installment, we look at how to avoid common mistakes at the bargaining table.

We show you how to prepare for the negotiations, bolster your side with trusted advisers, and get what you need while establishing a good relationship with your vendor. And since the ramifications of your negotiation will be felt for years to come, we cover the all-important escape clause to protect you if the vendor doesn't deliver as promised, plus we show you the best way to maintain a high level of service throughout the life of the contract. By crafting an artful deal, you can sidestep negotiation pitfalls and avoid costly mishaps.

• Negotiation is a team sport. In addition to IT's insight, you will benefit from the input of legal, purchasing and/or the business units that will be using the technology. A group meeting can help you develop your negotiation strategy.

• Be clear about your requirements. When technology contracts go wrong, it's often because the buyer and/or seller fail to communicate the exact need--and how the technology will meet that need. Remember that the vendor will have many people working on your account--make sure to get all of the requirements and vendor promises in writing.• Define all vendor claims, terms and promises. Your vendor reps are from a different world, and they may not define words, phrases or processes the way you do. The first step in any negotiation should be to define all contract terms in language that both sides understand.

• Look for a win-win agreement. Many users report that vendors who feel shortchanged often provide poor post-sale service. Don't try to "win" the negotiation--remember that the contract must be beneficial to both parties.

• Be flexible. If you're not getting the price you want, consider giving in on some of the terms of service. Many vendors will lower the initial price in exchange for longer-term service revenue. Remember that the sales rep probably isn't empowered to give deep discounts.

• Protect yourself. Be sure to have a lawyer examine any contract before you sign it, and establish contingencies if the vendor fails to deliver any part of the contract.

• Revisit the contract throughout its life. The vendor will come back to you often in an effort to upsell you--continue to check that the vendor is delivering against its original promises.0