Renegotiate, restructure, reset: working with vendors during and after COVID-19

Business disruption caused by COVID-19 has brought vendor negotiations front of mind for both CIOs and CFOs in Australia.

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Negotiating with technology vendors is facing a seismic shift for tech chiefs in Australia, as models move from traditional on-premise to consumption-based. This is forcing them to navigate different paths around data privacy, where business information is stored, cyber and legislated data breach legislations, connectivity stability, among other challenges.

COVID-19 has added to the complexity, introducing significant concerns about the economy and business solvency. This disruption has suddenly brought vendor negotiations front of mind for both CIOs and CFOs in Australia. In a recent Gartner webinar poll of IT leaders, 70 per cent indicated they had made IT budget cuts, while 63 per cent said they were likely to make more.

I recently witnessed a good relationship go sour due to tough negotiations that were needed to help a business survive. CIOs who go into vendor negotiations with an ego and a “customer is always right” attitude, generally always attract greater complexity and find little success. But it doesn’t have to be that way. 

Those who succeed approach negotiations with a business mindset and the acknowledgement that the vendor must also deliver economic benefit. They know that the salesperson has specific sales performance targets to meet to be successful. Clear and factual negotiations with win-win compromises each side of the table is a productive starting point. The best deal needs to get on the table without being a wrecking ball. Vendor management is an ongoing discipline, not a one-off deal.

Although the market conditions in Australia are tough at the moment, COVID-19 is creating some opportunities for CIOs to reset vendor partner relationships now and align technology investments for after the crisis.

Review options

Ensure successful negotiations with technology vendors by recategorising your vendor landscape into three buckets based on your contract period:

  1. <6 months – Renegotiate deals
  2. 6 to 18 months – Restructure deals
  3. 18+ months – Reset deals

Then review technology demand volume in your business. Start by having a clear view of how demand is being impacted by COVID-19 and what it will look like after the pandemic. Don’t forget to include future working from home requirements.

As you review your options, ensure you seek legal advice to steer you through your vendor negotiations.

Renegotiate contracts

The current economic conditions will add performance pressures for vendors and it’s a good time to renegotiate large contracts.

If your business is facing negative cashflow conditions, try negotiating an additional year on your current contract period based on not paying any fees for the next 12 months and spreading the repayment over the new contract period. 

If your conditions are more stable, consider negotiating contract concessions. Vendors will set concessions at a high mark point, so review if you need high concession point levels – service levels, limitations of liability, data retention and extraction – and modify as part of a win-win trade on your demands.

Now is a good time to review and reset your contract licenses, number of users, license keys, modules not used or any other contract metric that makes up your legal obligations. Once you’ve done that, renegotiate on the new base.

Most contracts are negotiated based on a combination of revenue, percentage profit and number of users. Review your flex conditions and reset the contract at new levels including end user compound annual growth rate (CAGR) assumptions. Negotiate the new levels without per unit cost increases.

In the new economic climate, vendors will have new price points to ensure they keep their market size and attack businesses in tougher business conditions. This means that per unit cost may be cheaper. Investigate these possibilities and reset the contract on lower per unit cost. 

Some vendors need to design and test niche functionality, especially in complex industries where specific solutions are required for go to market growth. Investigate being part of the new development cycle supporting changed future contract conditions at lower cost.

Review payment obligations

If your business is finding it tough, consider suspending payment obligations with vendors for six to 12 months or change payment schedules to support your free cashflow. Position the change in payment obligations as an investment in a strategic relationship.

If you’re on the latest technology version, you might mothball maintenance or decrease your level of support to a lower level. Some software vendors scenarios include changing to third party support option with savings in the range of 40-60 per cent in maintenance fees.

If you’re about to move to the cloud or change your cloud approach, consider asking competing vendors for solution migrations. The transition benchmarks will give you deep pricing insights as leverage to renegotiate with your current vendor. 

Also, review if you have any unused software that you could terminate, negotiate a credit on the contract or at least reduce maintenance costs.

Successful partnerships

The bottom line is that we are all in the business of doing business. Approach every negotiation with good fundamentals and build relationships at the highest levels possible with your vendor partners to ensure success.

Brian Ferreira is a VP and managing executive partner at Gartner. He advises C-Suite clients across Australia and New Zealand on shifting to a digital strategy to achieve new business outcomes and how best to approach technology, risk, governance, digital and agile investment for CFOs.

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