Imagine you are a C-Suite executive and your business is built on a franchise model.
Each franchise branch is owned and managed by a different person but they all use the same ERP and the big corporate umbrella entity that you own pays for all the services.
The individual owners dictate which software and services they use, how many licenses they need, etc.
Your annual bill for all the different contracts comes to $2.5 million.
How would you feel if I looked through your contracts and told you that, based on the prices your peers pay, you should actually be billed closer to $900,000 - a more than 60% savings - for the same host of services?
You’d probably want to flip the table we’re sitting at.
I started The Negotiator Guru because I believe in 3 things:
I want to go into each of these beliefs in more detail and give some case study examples to further demonstrate why I think these points are so important.
Clients should all pay the same price for the same product.
It’s common for people to believe the price they’re paying is equal to what their neighbor paid for the same product.
Due to both Master Service and Non-Disclosure Agreements between most software vendors and their customers, companies are not allowed to publicly share what rates they’re paying for their different products/services. Subsequently, software suppliers will almost never advertise a specific price point for enterprise customers but rather indicate “call for details” in the interest of driving the most revenue from the potential relationship.
In other words, in the art of enterprise SaaS sales, you won’t find any published rate information for you to benchmark your contract against. The only way for you to identify whether or not your rates are competitive is to engage a firm that holds that market intelligence as a result of analyzing contracts on a daily basis.
The fact of the matter is: Prices always vary.
No one pays retail as an enterprise customer but some companies achieve significant discounts compared to other similarly-sized operations.
In some cases, you’re getting ripped off if you’re not getting an 80-90% discount off published prices.
It wouldn’t be logical to expect a huge company like Coca-Cola and a small startup to be paying the same price purely based on volume alone. But brands of the same size with similarly-sized contracts (based on annual revenue & annual spend for their contract) should be paying the same price.
I have great respect for wonderful sales executives who sell value to customers, but my company believes the market should dictate a fair price for all IT goods & services (Services, Software, Hardware, etc).
The enterprise sales executive is arguably the greatest asset these IT companies have within their organizations. The good ones truly know how to sell “perceived” value.
Regardless of how personable a sales executive is, we believe the market should dictate what a fair price is - much like buying or selling a home. In order for this work, we believe that rate information should be readily available to customers. In order for this information to be shared legally, we need to enter into a commercial agreement with your company and charge for these advisory services.
Clients have the right to know what rates they should be paying in comparison to their peers.
On a daily basis we see similar-sized clients with similar-sized contracts have a 30 – 60% price variance.
Now, whether this is because some companies didn’t have strong negotiating skills or perhaps they just didn’t know how their contracts compared to the market doesn’t matter. What does matter is that clients know how their contract prices compare so they can make future decisions accordingly.
Ideally, through access to more information regarding IT contract pricing, you’ll be able to secure the best rates for your company. Leveraging this information can significantly impact a company’s bottom line.
But even if you aren’t able to achieve best-in-class pricing, we believe you should know what those rates are to empower decisions on how to work that supplier moving forward.
Often, relationships with IT suppliers run into the roots of your business and once you’re in that deep, it can be hard to break loose to find another vendor.
Even if you can’t get off of a big platform like Salesforce, Oracle or another ERP, you can make better-informed decisions about how you’re going to increase or decrease your use of that platform in the future.
There are a few market intelligence firms out there that supply basic and watered-down pricing information to clients but require a $30,000 per year subscription fee (per seat). This cost to have access to this benchmark data isn’t a feasible or justifiable expense for many companies.
We don’t feel that only Fortune 500 companies should have access to market intelligence firms and benchmark data.
The existing methods used to decide what the best price really is for any given enterprise could be improved. Most market intelligence firms take a general approach to setting correct pricing rather than looking at the specifics of each contract and the unique needs of each company.
For example, these firms will recommend that you should be getting a 60% discount if you’re spending $1 million with a particular IT company as a blanket rule.
Instead, we take into consideration the specific needs of our clients and use a Right Size, Right Price approach within every contract negotiation.
Clients should know what to look for in software contracts to eliminate potential issues before they arise.
Having a deep understanding of the terms of your most expensive contracts will help you save hundreds of thousands of dollars.
Here I want to briefly outline a few common contract issues that I see my clients face:
Price Protection (and not just by SKU)
Price protection generally comes up when you’re signing your first contract with a software provider. IT companies will compete for your business by offering you the lowest prices for their services with the expectation that they’ll be able to raise the rates once you’ve completely adopted the product.
Companies will always try to find ways to increase your annual expense. This is largely due to sales incentive plans in place with their sales development organization. Common tactics used by software companies include random internal audits to monitor usage (overage fees), product lift and shift changes (new SKUs), and service fees (for enhanced customer support).
More often than not our clients are very astute individuals that use their best efforts to price protect their organization’s contract for future years. That being said, it’s unrealistic to think anyone knows how to mitigate all the potential risks unless you do this everyday.
For example, to mitigate against the software companies from simply changing product names (SKUs) to bypass any preexisting price protection you may have on a specific product, we suggest you introduce contract language that protects your company using your total spend (vs a product-specific SKU) as the common denominator.
Make sure you have specific language in your contract about what happens in the case of a merger or acquisition.
Be sure to include language about a Termination for Convenience. This is a provision allowing you to get out of the contract if you acquire, or are acquired by, another company within a certain time frame - usually 90 days to 6 months.
Termination for Convenience eliminates the risk of having duplicate service providers for the same service after the transaction is closed. Without this stipulation, companies can find themselves with millions of dollars in expenses that are avoidable.
Note: In the interest of this article’s brevity we aren’t going to stipulate all the protections you need in an M&A transaction as this will be further explored in a future article. While the guiding principles of what to include within your contracts will remain consistent, client-specific protections will always require advisory services.
Termination for Breach
Termination for Breach language is important information to include in your contracts. In these cases, attorneys have to be involved and mal intent has to be proven by the accusing party.
This rarely ever happens and having the language laid out in the contract incentivizes IT companies to behave their best throughout the contract term.
It’s common to have language surrounding license limitations in your contracts. This basically says that you can use a specific license at a specific site for a specific reason.
These stipulations probably make sense on the surface and won’t alarm the person reading the contract but in most companies, with thousands of employees, not everyone is reading the contract. This could lead employees to inadvertently infringe on how the license may be used.
The best way for most companies to avoid this is to have seat-based pricing attached to specific personas (usage rights) rather than volume-based pricing.
We’ll go into this further in a future article but I want to point it out here that you should be in control of the audit capabilities - don’t leave that in the hands of the supplier.
When IT companies retain audit rights, they have a Trojan Horse to get inside your company and find more ways to increase your pricing. They already know more about your company than you do - don’t give them the reigns to take over completely.
Roles & Responsibilities (when working with multiple parties)
Establishing clear lines of accountability is incredibly important when you’re working with multiple third parties.
As the owner of Company ABC, you’ve got Supplier X and Supplier Y. In each contract where there are dependencies for another supplier to take action, you will want to include a Roles & Responsibilities Matrix so that all parties are contractually agreeing to the same responsibilities/accountabilities. Conducting this exercise is not only a good way to align parties prior to the start of any project but also contractually protects you from any finger pointing across these same parties which will ultimately cost you time and money.
This Roles and Responsibilities matrix is oftentimes called a “RACI” Matrix - Responsible, Accountable, Consulting, Inform. The example below shows how it is used to clearly define roles and responsibilities across and within parties.
You can clearly see the task at hand, who is responsible for it, who is accountable for it, who needs to be consulted for it, and who is informed by it. Where appropriate we suggest including your internal resources as well as more often than not your suppliers will require your team to take action as well. Our clients use the RACI matrix process within their internal organizations as well to drive alignment and avoid potential issues before they arise.
From a tactical perspective, it’s important that the same RACI matrix is included within each supplier’s contract so that everyone is operating from the same table, terms, and conditions. This often takes some negotiation but with the proper foundation and alignment, you shouldn’t have any pushback from your suppliers. In fact, if you do have a supplier that is heavily pushing back against this exercise we recommend our clients view this as a potential leading indicator for what’s to come with that particular relationship.
With these 3 guiding principles, we ensure our clients are negotiating the best contracts for their needs.
Whether you’re in the process of negotiating your first IT contract or are looking to save big on your next renewal process, we’re here to share our experience and expertise with you.
We want to ensure that you’re paying the right price for the right products.
We want to make sure you have benchmark data to help you make decisions about the future of those contracts.
We want you to avoid contractual pitfalls by including key language around important, often overlooked points.
If you want to know how your contracts stack up against those of your peers, contact me at Dan@thenegotiator.guru and let’s take a look.
* Generally assuming similar client size, contract value, and industry…
You may also be interested in:
A 3-Step Process to Reduce Your IT Spend 25% Or More
What to Look Out for When Negotiating with ERP Providers like Oracle & SAP
Understanding how Salesforce Negotiates