The Art of the New Deal

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.

Reprogram Your Reaction to Recession

Recession hovers and the usual corporate response is a rush to cut spending. That reflex makes sense, right? Money is tight, be tighter with money.

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.

Don’t Fear Consolidation

Between them, Microsoft, Oracle and SAP have bought at least 76 software companies since 2005. PeopleSoft? Gone. Siebel? Gone. Business Objects and Pilot Software? Gone and gone. Fewer vendor choices, goes the conventional wisdom, means the CIO loses leverage.

Not so, says Stephen Guth, director of the vendor management office for the National Rural Electric Cooperative Association (NRECA). Guth, who is in charge of dealing with IT vendors, helps buy software for the association’s 900 electricity co-ops and trains them to negotiate with vendors on their own. All told, the annual software spend is about $100 million.

“Consolidation isn’t bad. I’ve never experienced that,” Guth says. For example, he remembers being outraged at first by Hyperion’s “enablement fee”—a levy the vendor assessed whenever any customer wanted to upgrade to System 9 of Hyperion’s financial analysis software.

Hyperion reasoned it had so drastically rewritten parts of System 9, and added new business intelligence features, that it was like a new product, not a typical upgrade. Therefore, the maintenance fees customers had been paying didn’t cover a switch, according to Hyperion’s statements at the time.

Guth didn’t see it that way. The enablement fee was, in his opinion, “a sign of desperation to drive revenue” at a time—2006 and 2007—when Hyperion’s profit margins were slipping. Like Guth, many Hyperion customers complained, prompting IT research firm Gartner to warn last year that for the company to continue as a leader in business intelligence, it “will need to waive, or substantially reduce, the fee.”

Some customers balked and negotiated better deals for themselves. The University of California at Berkeley, for example, paid an enablement fee of $168,000 to move to System 9—35 percent of Hyperion’s initial $480,000 gauntlet, according to the college’s fiscal 2007-2008 IT budget proposal.

Guth, however, wanted no part of the enablement fee. Meanwhile, Oracle had begun circling Hyperion, sparking acquisition rumors. Guth knew NRECA wasn’t going to install System 9 immediately, so he decided to wait and see what might happen. He’s a lawyer with four certificates in contract management, purchasing and procurement and 15 years’ negotiation experience. He’s steely.

In April 2007, Oracle bought Hyperion for $3.3 billion and Guth took up talks with his old Hyperion sales representative, who continued to “demand” the fee, Guth recalls. But when that rep was replaced by one from Oracle, Guth argued against the fee and, ultimately, he paid none.

“For some reason, when it comes to software vendors, people get squirrely, thinking, ‘If a vendor has hooks into me, then I’m not going to be able to negotiate good deals,'” he says. Oracle has since dropped the fee altogether.

The Lesson

Even big vendors that acquire lots of other companies can’t ask for the moon every time, says NPI’s Muscarella. He’s sat across from Oracle, SAP, Microsoft and other powerhouses, representing companies such as Boeing, Lands’ End, Hilton and Tupperware. A recession hurts tech suppliers as much as anyone else. “Nobody is not feeling the pressure,” he says. “Vendors make claims that sound immovable. But in reality, that’s not the case.”

Beware the Word “Partner”

An easy patois floats in the conditioned air inside many companies. You’ve no doubt spoken it.

“How was your weekend?”

“Send me a note on that.”

“It’s all good.”

It’s more light chat than meaningful conversation. To this, now add any phrase containing the word “partner,” used as either noun or verb.

There’s not a technology sales rep breathing who doesn’t want to be the CIO’s partner. And certainly, a CIO should expect and coax key vendors to work side by side to reach common goals. But people so wantonly toss the P-word around, it can mean nothing.

Johnson & Johnson, the $61 billion manufacturer of healthcare products, has for 65 years operated according to a “Credo” that outlines J&J’s responsibilities to customers, employees, local community and stockholders. The credo, which is on the company’s website in 32 languages, talks about respecting individuals’ dignity, managing ethically and giving suppliers the chance to make a fair profit while J&J does as well.

It’s a how-to guide for becoming a Johnson & Johnson partner, actually, though some slick vendors fail to see it.

Employees at all levels live the credo, according to LaVerne Council, Johnson & Johnson’s CIO. The company has received piles of awards for diversity, leadership, opportunities for working mothers and equality in the workplace.

That makes for a nice place to work, Council says. But vendors sometimes misinterpret the conviviality they encounter. Some assume too quickly that they are partners—or they think they can pretend to be.

“J&J is a very collegial company,” she says, “and people read that as weakness, frankly.” Ouch. A bigger mistake one cannot make with Council. Before joining Johnson & Johnson as CIO in 2006, she was global vice president of IT at Dell and before that a partner at Capgemini. She was also a consultant at Mercer Management and Accenture and holds an MBA in operations management. She knows the game and wastes little time calling someone out (see “Worried About a Recession? How to Hold the Line on Your IT Budget”).

For example, if a vendor’s developer or consultant working onsite perhaps doesn’t live up to the credo, Council talks to that person’s manager. “To give them the opportunity to understand the disconnect and give them a chance to step up,” she says.

What that manager does then affects the life of the engagement. Council declines to name names, but says that she recently faced a situation in which a vendor continued to tell two divisions within Johnson & Johnson different stories about its product and pricing. Council cited the credo to that person and said she expects her suppliers to act the same way. “You end up very disappointed in certain folks’ actions and behaviors. But it doesn’t mean we will tolerate it,” she says. Things didn’t improve. She doesn’t do business with that vendor anymore.

The performance of another vendor last year also fell short, but the way that company handled it won Council’s favor. The vendor missed deadlines for a key project. Then a leader on the vendor’s team made an appointment with Council to talk about the problem. “It wasn’t a hostile conversation,” she recalls. “He acknowledged the mess and it wasn’t about trying to save face. It was about trying to make it right.”

They worked out a plan. The vendor didn’t run away or ask for more money to bring more people on to fix the project, she says. Come next review time, the vendor had met the mark. That’s the behavior Council expects before calling anyone “partner.” “We’re all really nice people,” she says. “But we want really nice people who deliver.”

The Lesson:

Partnerships are built on the quality of work delivered, not on personalities and hale handshakes. Define your expectations. And don’t use the term partner until you see the vendor produce work that meets the goals —your goals.

Fight Back on Maintenance

Even when the economy froths with prosperity, the one negotiating point guaranteed to provoke both parties is the price of software maintenance. It takes special skill to argue straight-faced that the maintenance fees vendors devise are scientific. The wiggle back and forth on those fees can get contentious, says John Doucette, who has spent the last seven years as CIO of United Technologies, a $60 billion conglomerate that includes Pratt & Whitney, Sikorsky, Otis Elevator, Carrier, UT Fire and Security, and Hamilton-Sundstrand. Lately, Oracle has asked Doucette for annual maintenance fees equal to 22 percent of license costs, while SAP wants 17 percent to 20 percent. Both are too much, Doucette says. Microsoft calls its product care plans different names, such as “software assurance,” and asks for about one-third the cost of the software, Doucette says. But it all looks like maintenance to him—and expensive maintenance at that. “Thirty-three percent!” he rails. “Repaying for your software every three years? It’s frustrating.”

So far, Doucette has pushed back and negotiated his vendors down. What aggravates him, he says, is that he knows vendors are developing big chunks of their product lines offshore, where labor is cheaper than in the U.S.

United Technologies itself hires offshore outsourcers for some programming. “I know I’m five times more productive than several years ago, so [the vendors] have to be, too,” says Doucette. “But my price from Oracle and these other companies has not gone down at all.” Average software maintenance costs amount to 26 percent of the total cost of ownership for the software, which IT managers say is too high, according to a recent Forrester Research survey. A “fair” maintenance cost would fall between 10 percent and 12 percent of the cost of ownership, according to the poll of 215 business and applications professionals. “We get pressure from our CEO and CFO every day about productivity,” Doucette says. “We don’t think we’re getting any price productivity from software providers.”

The Lesson:

Object to high maintenance fees as many times as it takes. Then find a way around them if necessary. One way to avoid getting locked into high maintenance fees is to hire third-party service providers to do the job, says Forrester analyst Ray Wang.

Stir the Pot

UniGroup, a $2.3 billion transportation and relocation services company, keeps a stable of key vendors: IBM, Verizon, Microsoft and Cisco, among others. But CIO Randy Poppell regularly puts out requests-for-proposals seeking bids from those vendors’ competitors. He’s been able to shave costs this way and gain more services for the same money, he says. (For more on this subject, read “Why You Need More Than One Software Vendor”.) IBM, for example, recently lost some of UniGroup’s IT business; Poppell gave it to another smaller vendor, but he declined to provide details. Pitting one vendor against another in an effort to keep your incumbent lively and responsive is a classic vendor management tactic. Classic for a reason: It works.

But there are more creative ways to harness angst.

A few months ago, Mitchell Habib, executive vice president of global business services at The Nielsen Co., asked his vendors—including those with whom he doesn’t do much business—a question: If you were competing with me, how would you set up your ideal IT infrastructure? In his challenge, he gave the vendors 30 days and 30 of his own people to work on the project. Habib is now considering some of the ideas dreamed up by Oracle, Accenture, Sun and others as he picks his way through a major reconstruction of how Nielsen manages technology. Habib—who has been a CIO at Citigroup, General Electric and Ryder—was hired a year ago to plan and oversee the IT overhaul at the $2.5 billion information and media company. At Nielsen, he’s introducing new software platforms and last October signed a 10-year, $1.2 billion outsourcing deal with Tata Consultancy Services.

Each vendor brought back ideas to Habib that showed off their own technology, of course. But because they worked closely with technology and business analysts from Nielsen to come up with those ideas, they were tailored to the company.

The best part? It was all free. The vendors are so hot for Nielsen’s business, they volunteered their time and people. It doesn’t hurt, either, that Habib is on a first-name basis with the CEOs at those suppliers.

“People want to help. They just don’t want to be taken advantage of,” he says. Too often, CIOs move quickly to throw a vendor proposal out on price, says Ed Hansen, an attorney who specializes in negotiating technology deals at Morgan Lewis & Bockius in New York.

Habib, however, was shopping not for lower prices but for high concepts. He was probably able to learn a lot more about how those vendors work and what their capabilities are, Hansen speculates, than if he were out looking to scrape a few percentage points off his costs.

The Lesson:

Don’t get tangled in dollar signs. “Eliminating someone on price without knowing what’s behind the price—that will kill you in three years.” Ed Hansen says. “That’s when a new challenger comes along and you’ve got the old, uncreative, cheap vendor in there that you have to rip out at high cost.”

Manage for Tomorrow

So take a breath. Don’t let this recession talk scare you into making mistakes in how you manage vendors and advise CIOs and negotiators (see “Reprogram Your Reaction to Recession”). History shows that recessions typically end within one year. That’s a short period of time in the life of a technology deal. A five-year contract for telecommunications services that buys you savings this year but escalates costs in 2009, 2010, 2011 and 2012 isn’t smart. Nor is forgetting that you and your vendors both must navigate economic downturns.

As Hansen puts it: “Be very, very careful not to do things that have long-term impact that you’ll regret simply for a short-term gain.”