The Art of the New Deal
Take it from the masters of vendor management: Despite a looming recession, now is the right time to push vendors for a better deal and to make industry consolidation work for you.
CIO — The last time we sweated through an economy as harsh as today's environment—back around 2002—the technology market looked very different.
CIOs, fresh off a multiyear technology buying spree fueled by the dotcom boom, were trying to justify their spending in an uncertain post-9/11 economy. Vendors such as PeopleSoft and Business Objects were selling strong against Oracle, Microsoft, SAP and other big rivals. Influential financial companies, such as Merrill Lynch and E-Trade, had just begun committing to Linux. Sure, the economy stunk. But CIOs could negotiate better deals thanks to a competitive vendor landscape.
Today, CIOs have mostly mastered the case for ROI but are under new pressure to come up with ways IT can generate revenue for their companies. Open-source Linux is now an established standard; less-tried computing models such as virtualization are the current risky bets. Meanwhile, Microsoft, Oracle and SAP have snapped up dozens of other technology companies, shrinking CIO choice in the enterprise vendor market. And the economy stinks. Again.
But you're wrong if you think a potential recession, combined with big-time consolidation in the software market, has stripped CIOs of all bargaining power. Now is the right time to push technology vendors for a better deal than the one you have, even if you've recently signed contracts, say CIOs and their heavy-hitter negotiators.
But such Pavlovian management of IT spending could bring trouble by limiting the competitive moves a company can make at a time when agility counts, says Howard Rubin, CEO of consultancy Rubin Systems, a Gartner senior adviser and CISR associate.
Too many senior executives see technology almost schizophrenically, Rubin says. "They know it is a key to competitive advantage, they know it has value, but they view it as a cost." The implication being that when recession hits, IT and finance managers start to pull back on technology projects to save money. This is "shooting yourself in the foot," Rubin says, because investing in IT should save more money than the IT project costs, or generate revenue.
Plus, he adds, you can bet that while you're hesitating on IT projects, some of your competitors are not cutting, indeed are spending more on, IT—which only opens up the gap between you and them even more. "Spend into the skid," Rubin advises. Ed Hansen, a lawyer with Morgan, Lewis & Bockius who specializes in IT contracting, offers another way to free up money: Don't wrestle with your technology vendors for discounts. Instead aim to get more product or service for the money you do pay.
For example, telecommunications deals are commonly viewed as tactical and sending bits through a pipe is a commodity transaction, Hansen says. Really, though, telecom is becoming a strategic technology, he says. "Look at all the content being delivered over the Internet, look at your wide-area network to other countries, your voice-over-IP systems."
Rather than trying to cut your provider to the bone on pricing, work in some extra guarantees on uptime or the amount of traffic that moves on a daily basis, Hansen advises. "If you think you're going to cut 10 percent of the IT budget, that's nice. But the world advances," he says. "Get more for that same money."
-K.S.N.
But the way you go about it will make all the difference.
To get the inside track, we talked to top CIOs who take no guff as they command technology budgets in the hundreds of millions. We also interviewed veteran negotiators who specialize in crafting IT contracts. With advice ranging from how to make industry consolidation work for you, to how and why to hang back from forming a so-called partnership with a tech supplier, these diplomats relish doing deals in adverse circumstances.
You can, too. If you manage vendor relationships with strength and subtlety. (Read about the challenges small companies face with big vendors in "What if Yoda Ran IBM?.)
"Everyone understands we're facing recession. The vendor doesn't want to lose you," says Jeff Muscarella, managing partner at NPI Financial, a spend management consulting firm in Atlanta. Know that, he advises, and use it.
