by Greg Hall

Is strategic planning the key to IT cost optimization?

Oct 17, 2017
BudgetingCIOERP Systems

How a Fortune 500 company saved millions using this win-win negotiation tactic.

company strategy ts
Credit: Thinkstock

When it comes to renewing IT contracts, cost optimization is typically top of mind. While there are several ways to approach renewal negotiations, the most effective means to achieve long-term cost-savings is by leveraging a comprehensive future demand roadmap. Why? It’s the key ingredient in a recipe to maximizing your cost optimization opportunity and producing a ‘win-win’ scenario for both parties.

Competitive bid or sole source negotiation?

If your provider has not been performing or your future demand isn’t best aligned to your providers strength and experience, the more common competitive bid or RFP approach is best. But this approach could make the negotiation more difficult as it instantly puts your incumbent vendor on notice. The provider may respond with discounts but you can be sure they will do their best to win in other areas of the contract that favor their best interests. They might include annual COLA increases or uncapped time and material-based Statements of Work (SoWs), for example, that can add up in the future.

On the other hand, if your provider is performing at a high level and their experience aligns with your expected future demand for the next 3-5 years, sole source negotiations should be the preferred path. This approach benefits both parties. Clients benefit by avoiding potential transition challenges and the time-consuming process of vetting multiple providers, while the provider benefits in avoiding the costs of sales activities and competition. With both parties focused on renewing the relationship, the discussion can proceed directly to outlining the key commercial constructs and asks of your provider.

Maximizing leverage: how one company got the upper hand

Having established the willingness to enter into sole source negotiations with your incumbent provider, it is critical to assess your leverage. Companies with a pre-approved and financially backed multi-year demand forecast are appealing to providers as they represent a clearly defined multi-year, sole sourced, revenue opportunity. Multi-year client commitments are extremely valuable to providers, so companies with a solid demand forecast have a strengthened position at the negotiation table.

I recently worked with a Fortune 500 company that was in the third year of a 10-year technology refresh roadmap when their system integrator’s agreement was up for renewal. The provider saw potential for a multi-year minimum spend commitment and jumped on the opportunity to propose a renewal without competitive bidding, citing their solid performance to date, experience gained, and fit for future phases. The provider, having established a healthy relationship with this company through the initial phase of this modernization roadmap, sought to secure commitments to downstream phases via a multi-year renewal of the agreement worth over $100 million.

With this amount on the line, the company needed to analyze their savings options and take advantage of having a long-term plan in place.

Empowered with a strong recent history of solid provider performance, a clear 5-year forecast of future demand, and shared interest to renew, the mutually preferred path was to first look to negotiate an agreement extension. The company knew they had leverage with their solid pipeline of confirmed demand and wanted to maximize their return in commercial negotiations. With leverage on your side, the focus shifts to packaging your “ask”.

Key attributes the company leveraged from their sourcing plan:

  • A clearly defined and comprehensive understanding of the value their business would bring to a Systems Integrator or IT provider as a well-known company
  • A healthy relationship with their incumbent Tier 1 Systems Integrator
  • A confirmed and financially supported long-term commitment to fund their plan
  • An annualized opportunity of spend

Validating the strength of your negotiating position with market intelligence

Once the company had a firm grip on where they stood with their IT strategy, they sought market intelligence and expert consulting to further validate the strength of their negotiating position. Unbiased outsider assistance paired with their strategic multi-year demand forecast and provider sourcing plan gave them the leverage to negotiate highly favorable and cost-effective terms with their provider. Even though the company was in an advantageous position, their vendor was happy to skip competitive bidding and make material, sustainable commercial concession to secure a multi-year commitment from the company.

Win-win outcomes

As a result, the company “won” by securing:

  • $15M in incremental savings over a 5-year spend commitment
  • A competitive and more favorable payment structure
  • Improved warranty terms
  • Capped contingency on a fixed fee structure
  • Extended COLA adjustments

The suppler “won” by securing:

  • $100M+ revenue commitment over a 5-year term
  • A contract extension without competitive bidding

There is a long list of benefits when it comes to implementing a long-term IT strategy but the ability to leverage that strategy to negotiate otherwise unattainable cost-savings in your provider renewal may be at the top of the list.