Understanding how Salesforce Negotiates

The key to properly negotiating with Salesforce is understanding how the organization works. Salesforce has a brilliantly designed sales system that is set up to maximize revenue from every account. Many of the tactics used in its sales process and organization design are borrowed from other big players such as Microsoft, Oracle, SAP, etc. Our goal with this article is to give you a strong understanding of the Salesforce machine so that you can prepare accordingly.

Understanding how your sales rep fits into the machine

Maybe you like your rep, maybe you don’t. We see clients all across the spectrum in terms of the relationship they have with their rep. Regardless of what your relationship is, it’s important that you understand how your rep fits into the actual Salesforce machine. The first thing you must understand is that your rep is at the bottom of the totem pole in Salesforce. They are the “in-the-weeds Salesperson” who is put out to handle tactical sales and execution .By design, your rep is given limited information. They actually are never fully educated on what the rates should be or what discounts they can even provide. Let me repeat that: Your rep does not even know what rates other companies of your size are getting other than those within their own portfolio. Salesforce limits the amount of discretionary information it shares with its sales organization intentionally. The company does this many reasons, one of which is so that your rep can sell to you in a genuine and authentic way. If your rep knew that other companies were paying 30% less than you, they might feel guilty for charging you 30% more and/or fight harder for you to get a lower rate in the interest of closing the deal. Think about this; if your rep doesn’t know that you are paying 30% above the most competitive rates, and instead actually believes you are getting a great deal, then they are going to explain this to you in an authentic way. They may tell you something like: “This is the best rate I have ever given a customer of your size.” This may very well be the truth, but that doesn’t mean it's the best rate that Salesforce can provide for a company of your size, etc.Instead of thinking about your rep as the opponent in this negotiation, it’s important to understand how they fit into the organization.Our goal in our 4-step negotiation process is to coach your rep in a way that organically sends the most effective messages up the totem pole (aka the "business desk") at Salesforce to ensure you get the best deal.

Understanding the “business desk"

‍In order to drive the largest positive impact in any negotiation with Salesforce, we need to work with the “business desk." The “business desk” is a somewhat secretive sales management team inside of the company that is intended to purely support your sales rep. Remember, sales reps are given very little decision-making authority. All official decisions that have any material impact on a client's rates are developed and approved by the business desk. The concept of a business desk is not new nor unique in highly complex/profitable sales organizations. It was originally developed by companies like McKinsey and originally tested, validated, and further refined in firms like Microsoft. At its most basic and original function it was intended to as act as a quality/price control organization before the concept of Software as a Service (SaaS) was even conceptualized. Fast forward many years and it has developed into an elusive organization that ultimately acts as the "bad guy." In other words, it holds the rights to any decision making but will never officially interface directly with the customer leaving your sales rep to pass messages back and forth.As a result, your goal in a negotiation is to train your sales rep on how to best communicate and send messages to his business desk that are going to help you achieve more out of the negotiation.Yes, you heard that right. Your job in this negotiation will be to indirectly train your sales rep on how to work with their own organization to get you the best possible deal. That is, of course, assuming they actually want you to get a good deal…Our goal is to empower you to send the right messages, at the right time, to the business desk in order to meet and/or exceed your desired objectives.

Your sales rep’s emotions

‍Sometimes your rep may get somewhat heated during the negotiation and say something like “I am doing everything I can to get this deal through for you but I just can’t go any lower.”When your rep says something like this to you it’s important you keep a facts based demeanor and keep any emotional response in check. The company’s goal here is to humanize the sales organization and make you feel empathetic during the negotiation. Their emotional response will naturally distract you from the actual facts of the deal.Please remember your rep may actually be a very honest person. Subsequently, their emotional response to any negativity within the negotiation is designed as part of the sales system. In other words, when your rep gets emotional about fighting for your discounts, that is Salesforce winning…a clear indication of the sales system producing the exact desired result.This is why we call it the Salesforce machine. The dynamic between the client, sales rep, and business desk is brilliantly designed. The key here is to understand and identify these dynamics.

Divide and Conquer Tactics

‍Whenever we describe this tactic to our customers, we almost always hear; “Yep, that is exactly what they did.” Divide and conquer is a brilliant, yet traditional, sales tactic that Salesforce has perfected over the years. The larger the client organization the more important and effective these tactics become for Salesforce.The concept is simple: Build as many stakeholder relationships as possible at various levels inside the client organization with the overall objective of obtaining as much information as possible. Use this information to extract conflicting stories of the organization’s wants and needs so that the client may potentially buy more than they need.If you are a smaller account under $300k per year, you may not see this happen. But as your annual spend reaches $500k or $1M+, these tactics will most certainly be used as a way to grow your account.

Understanding Divide and Conquer Tactics

‍Let’s explore a simple example of how this routinely plays out in a client organization… Imagine you are in IT Procurement and hold the responsibility of negotiating your company’s Salesforce contract renewal. As your renewal starts to get closer, you may suddenly experience that Salesforce has, without your direct knowledge;

Invited your C-Suite to a basketball game with courtside tickets;
Reached out to IT Department heads to discuss their 1-3 year growth objectives;
Initiated a direct connection with your VP of Sales;
Identify and reach out to your top Sales Representatives to explore how they could further use the tool;
Invite your colleagues to a “wine and dine” evening for relationship building purposes, etc.

Best of all is that those taking the above actions may not actually be your direct sales rep but rather their superiors who have the sole purpose of gathering as much intelligence about your organization as possible. With this momentum, Salesforce will commonly know more about the needs and wants of its client organization more than their client contact (aka you!). They will use this information to their advantage and create organized chaos and confusion in your organization. Further expanding upon our original example, let’s explore the output of these tactics:

‍CEO - Your CEO is taken out to a basketball game where the higher ups at Salesforce paint a picture of what your organization could look like with added functionality and full adoption of Salesforce. They gain his buy-in and suddenly your organization has pressure coming down from the top to roll out Salesforce to the entire organization.CFO - With this new pressure coming down, your CFO is left scrambling to figure out how to create budget for these additional Salesforce expenses which were not in the original budget. Your CFO talks directly with Salesforce and they start getting creative on cash flow. They offer to move your renewal to January, instead of September, to utilize multiple fiscal year budgets.CIO - Your CIO is furious because the CFO is now going to pull funds from his operational budget. Your CIO had planned to use these funds for other business critical initiatives that need to be completed this year. Subsequently, he’s also upset that Salesforce is talking with his colleagues and keeping him in the dark. This creates and emotional response and your CIO reaches out directly to Salesforce. Salesforce then begins meeting with your CIO directly and discusses their overall IT roadmap.

‍VP of Sales - When your VP of Sales speaks to Salesforce, he shares his ideal vision and requests more functionality and training for his team to increase adoption.

‍Sales Reps – When a few of your top performing Sales Reps are contacted by Salesforce, they further explain how it would be great if they received deeper support, had additional customizations, and more functionality.

‍Salesforce Admin - Your Salesforce Admin is the primary business stakeholder providing requirements to IT Procurement and also responsible for the outcome of the negotiation. They now have conflicting messages coming from every stakeholder in the organization…

The CEO wants to implement the full vision;
The CFO doesn’t have the budget;
The CIO is pissed off because his IT budget is getting pulled and Salesforce still doesn’t integrate properly with their ERP;
Your VP of Sales wants more functionality and training;
Your Sales reps wants more customization and new functionality.

What does your Salesforce Admin do in this situation? They ask Salesforce: What do you think I should do? As a result, Salesforce is now running the negotiation. They are telling you what to buy and when to buy it. At this point, you have lost control of the negotiation and Salesforce has essentially “won the game.”If you let Salesforce divide and conquer without the proper planning and communication strategies, you will lose significant value creation opportunity.

An Aligned Organization is a Rarity

The situation we just described to you is extremely common in both large and small organizations. Most organizations suffer from what many of us know as “initiative overload” and simply do not commit the time or resources to align on forward looking business (not just IT) plans for leveraging strategic platforms such as Salesforce.Salesforce knows this and leverages this lack of alignment to create growth opportunities.It is exceptionally rare to find an organization that is: 1) actually aligned; 2) has a plan for how they will use Salesforce over the next three to five years (aligned to its business objectives).As part of negotiation preparation, we drive clients to curate this planning and alignment so that you know what you need before even starting the negotiation.Our proprietary tool for doing this is something we call the Salesforce Roadmap (catchy right!? ?). At a high level, this is simply a detailed list of “what you need” and “when you need it.” Again, you need to be clear on the “what” and the “when.”If you don’t create your own Salesforce Roadmap, then Saleforce’s Divide and Conquer techniques previously discussed will likely create an over-inflated roadmap for you. Subsequently, if Salesforce creates the roadmap for you, then you are left on your heels saying “Wait a second….is this what we actually need or is this just what they are telling us that we need?”

The Salesforce Fiscal Year

‍Another very important thing to understand about Salesforce is that their Fiscal year ends on January 31st. Now at first you may say, “That’s kind of odd…why would anyone make their fiscal year end January 31st?”Once again, this is done by brilliant design.Salesforce is an expert at working with Corporate America. It knows that most companies operate on a standard calendar fiscal year (January-December). Subsequently, most budgets are solidified sometime between October – January which opens up a new (potentially larger) budget.By moving your renewal to January, Salesforce is now able to…

Influence your fiscal year budgeting conversations through proposals;
Be flexible with payment terms enabling the ability for clients to use two fiscal budgets for a single subscription year; and,
Have increased control over its own fiscal year budgeting, forward looking market statements, and investor relations.

Think about this…by placing their fiscal year end at January 31st, Salesforce now has a great excuse to say “Let’s renew early because we will be able to provide the greatest discount right before our fiscal year ends.” In most cases, Salesforce will naturally incentivize you to renew early with a January effective date. While this may seem like a no-brainer, we regularly advise all our clients to take advantage of this offer only when you forecast significant growth/decline in your account.

The Difference Between a New and an Existing Salesforce Customer

‍It’s very important to understand that Salesforce treats new and existing customers very differently. Unsurprisingly, sales performance incentives are very different for both segments.New CustomersWhen you are negotiating your first purchase with Salesforce your rep is incentivized to sell you as much as possible. While this may seem like common sense it’s important to know that this particular incentive is extremely high. Since selling a new customer is always harder than a renewal, Salesforce designs its compensation structure so that reps see a significantly higher sales commission from new customer accounts.

Watch out: Initial Footprint -Naturally, the larger initial footprint a software supplier has in your organization the harder it is for you (the client) to leave. No matter whether you hire an external advisor or conduct the negotiation by yourself please be cognizant of the fact there is a natural tendency to overbuy in the 1st year in the interest of capturing the “greatest discount.”
Note: Based on customer demand, we will be writing a separate article specifically focusing on New Agreement Customers titled “Top 5 Tips When Negotiating a New Salesforce Agreement.”

Existing Customers

‍The Salesforce machine has been developed in a way that promotes and incentivizes year-over-year growth in your account. This may be common sense to some, however, what you may not expect or realize is that prior to any renewal discussions from even occurring, Salesforce has already booked (planned for) a 10% increase in your account.

What this Means - While you may be going into the negotiation wanting to keep the same rates or even reduce them, Salesforce has established a negotiation baseline that is 10% above your current budget. As we will discuss further in future articles, this increase may come in many different forms…some obvious and others not.‍
Note: Based on customer demand, we will be writing a separate article specifically focusing on New Agreement Customers titled “Top 5 Tips When Negotiating a Salesforce Renewal Agreement.”

This is how Salesforce operates and is a standard expectation across all of its business lines. In other words, if Salesforce were to maintain the status quo on current rates and license counts (aka 0% increase), then your sales rep’s performance metrics would be negatively impacted.Subsequently, one of the worst scenarios for Salesforce is if your contract is reduced in anyway at renewal…even by one dollar. (Yes, we actually have a funny client story about this…)Even if you’re dropping a service like Pardot or Premier Support, Salesforce will automatically fight to get those funds reallocated to other licenses or add-ons (“lift and shift”). Salesforce incentivizes its sales reps to identify and execute these budget “lift and shift” opportunities at renewal time in underutilized accounts with nearly as much intensity as net new revenue.

Understanding Salesforce’s Products and Services

‍Forgive our play on words here but what you must understand about Salesforce’s different products and services is that they are hard to understand. Many of our customers who have now been with Salesforce for 3, 5, 10+ years often complain “It seems like they keep changing the license tiers or product names. It’s just confusing and I don’t really understand why I am paying more for what seems like the same thing.”Once again, this is by design and taken right out of the Microsoft playbook.Think about it like this…Imagine your renewal comes up and you have been purchasing X product or service for the past 3 years. Your rep now conveniently informs you that “We have actually discontinued that specific product and it has now been rolled into product Y. You will maintain the capabilities of our legacy product X but with enhancements that will help you get more from the platform. As a result of these new enhancements your license cost has increased, the new price is Z.” Sound familiar?You were just thrown a curveball and suddenly are unable to compare apple-to-apples. Instead of focusing on the price of that new product, you are focused on what it is, and if this is a right fit. This is revenue generating distraction impacts both large and small customers. Salesforce sales incentives vary by product and serviceIt’s important to understand that sales incentives vary across Salesforce’s different products and services. This is done for a variety of reasons but the most common example being new product/service introductions are typically incentivized with higher commissions. As a result, it is natural for sales reps to push new products to renewal customers.In addition to new products, high commissions are paid for “land grab” product/service lines. When we say “land grab” we mean a product or service that breaks Salesforce into a new department inside of your organization. A few common examples are:

Pardot is a land grab into your marketing department; and
Service desk is a land grab into your customer service department.

Salesforce fights hard to make these land grabs for a few key reasons:

It makes them stickier within your organization;
It gives them more contacts which creates further opportunities for their divide and conquer approach; and,
It gives them an entirely new department where they can land and expand organically.

Whenever you are considering offering up a “land grab” to Salesforce (expanding into different product lines, departments, etc.) please know you have a great negotiation opportunity. This leverage can be used to lower your overall total cost of ownership if navigated correctly.The Bottom Line
The “Salesforce machine” is a brilliantly designed sales system. The first step to understanding how you can reduce your rates is to know what you are up against. A few key takeaways:

Your reps do not know the true rates for comparable companies;
The “Business Desk” is the only decision-making authority;
The “Divide and Conquer” approach is the most commonly used, and most successful, sales tactic by Salesforce to drive sales growth;
The Salesforce fiscal year ends January 31st. This enables the use of multiple fiscal year client budgets to fund growth;
New and existing (renewal) customers are treated very differently and should use a completely different negotiation approach;
Sales incentives vary by product and service. “Land Grab” products often carry a higher incentive as it expands their footprint in your organization.

Our goal with this article has been to educate you on the key points of how the Salesforce machine operates. Based on significant current and prospective customer requests, we will be writing additional articles that do a deep dive into the many facets of successfully negotiating with Salesforce.

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From Fortune 500 giants to fast-growing innovators, TNG has helped clients save 20% – 40%+ on enterprise software contracts — even when they thought it was impossible

Quid Pro Quo: Salesforce & Salesforce Consulting Partners

We commonly get asked the following questions in varying forms:

Is The Negotiator Guru (TNG) a Salesforce Partner? Are you on the AppExchange?
What are the differences between TNG and a Salesforce Partner?
Why can’t my Salesforce Partner advise me on the best possible rates/products for my Salesforce environment?

Before we get into the specific answers to the above questions, let us share a brilliant unsolicited quote from one of our recent multinational clients regarding the motivational differences between TNG and a Salesforce Partner:

Expecting a registered Salesforce Partner listed on the AppExchange to give you completely impartial advice on Salesforce pricing is like expecting a court room prosecutor to share their notes with the defense before every trial.

Why, you might ask? The answer is simple: All Salesforce Consulting Partners have an unavoidable conflict of interest with their clients. Why? Because of the inherent need for these “Partners” to make both their client and Salesforce happy. In this article we’re going to cover this conflict of interest and why TNG is different. Salesforce Partners Always Have

Two Clients (and one isn’t you) Salesforce Partners have two customers:

You the client; and,
Your Salesforce account management team (hereby collectively referred to as “Salesforce”)

The fact of the matter is that your Salesforce Partner is, by design, incentivized to keep both its client and Salesforce happy. The difficult truth is that you, the customer, are the least important of the two clients. Yes indeed, more often than not, your Salesforce Partner has a greater long-term interest in keeping Salesforce happy. Yes, we know this sounds horrible, but we hope you appreciate our directness here. Let’s dig into two key, but interrelated, reasons:

‍1. Business Relationships

Your Salesforce Partner focuses heavily on keeping a strong business relationship with Salesforce. Why? Because Salesforce is their single most effective sales channel to acquire new business. When Salesforce identifies a new or existing client that needs custom development work, they have the entire Salesforce Partner community to consider when providing a recommendation to their customer. Naturally, those Salesforce Partners that are “supportive” to their sales process will be referred more and more business.

‍2. Money

‍More referrals = more business = more money. Back in the 18th century Edmund Burke once said “…never bite the hands that feed you.” Presenting this differently, if you were a Salesforce Account Executive and you had a Salesforce Partner repeatedly suggest changes to an account that materially decreased your sales compensation revenue, would you continue using that Partner when you have others options available? To be clear; we are not saying that all Salesforce Account Executives are unethical in how they conduct business. However, we are stating that there is an inherent fundamental conflict of interest for the Salesforce Partner who commercially needs to appease both parties. The unfortunate situation is that while a Salesforce Partner may know a customer is being sold more products and/or services than they actually need, they rarely speak up for the reasons above. We’ve even been told there is an informal blacklist inside of Salesforce that keeps track of these Partners that raise cost avoidance opportunities during the sales process. We don’t like writing about this topic but we know every customer wants the truth.

‍Why TNG is different

Quite simply we are only focused on keeping you, the client, happy. When the firm was founded we only included a “pay for performance” compensation option to ensure our incentives were aligned with the client. Over the years, we added an “advisory fixed fee” option purely based on repeated client requests.

‍TNG’s Right Size & Right Price Process

Part of our secret sauce is a deep focus and understanding on 1) how Salesforce works, 2) you as a customer, and 3) best practices on how to quickly drive savings in your environment. While strategic negotiation is an art, our Right Size & Right Price process is more of a science based on its repeatability across all industries.

The Right Size process

‍ focuses on identifying consumption based savings opportunities within your organization.

Our three most commonly identified opportunities within this process are:

“shelfware” elimination
license optimization
governance enhancement. On average, we identify 24% savings opportunity within this process alone.

‍The Right Price process purely focuses on your product and service price points within your specific Salesforce contract. The vast majority of our clients reach out to us for this service alone. Specifically, they want to know how their prices compare to their peers and if they’re getting a “good deal.” We have the largest database of Salesforce rates in the world and can quite easily identify if there is a price optimization opportunity within your various SKUs. Unlike other large market intelligence firms, we are able to isolate your realistic “should cost” price points based on your industry, annual revenue, and annual contract value. The others simply will share a “best in class” rate which is ambiguous and often self-serving. On average, we identify a 22% savings opportunity here but your specific opportunity could be as high as 305% (yes, this was a real client). Fit-for-Purpose Engagement Style The Founder of TNG, Dan Kelly, feels strongly about providing our clients options on how they engage our firm depending on each individual client’s needs. Some clients want a “negotiation-as-a-service” approach while others simply want the output of our Right Price process to identify target price benchmarks to use within their own negotiations. We welcome you to start a conversation with our firm to determine how we can most effectively and efficiently support you.

‍Summary

To recap, here are the basic points of what we’ve covered in this article:

Your Salesforce Partner has motivation to keep both you and Salesforce happy;
They aren’t able to easily share cost savings opportunities with you in fear of losing future opportunities with other Salesforce customers;

The Negotiator Guru is only focused on driving cost savings for you by negotiating with Salesforce, the client;
We have a proprietary negotiation process that includes both the art of negotiation and the science of opportunity creation inside of your Salesforce organization,
On average, we save clients 20-50% on their Salesforce annual expenses through our Right Size and Right Price process; and,
On SELA Agreements (Salesforce Enterprise License Agreement), we typically generate a 41.3% savings for our clients.
We only accept clients within our full negotiation service where we know we can make a huge impact.

What to Look Out for When Negotiating with ERP Providers like Oracle & SAP

Do you know how to protect yourself and stay in the driver’s seat during contract negotiations so that you won’t be held ransom by your ERP provider? In this article, we’re going to outline the top things you need to take into consideration when negotiating contracts with Oracle, SAP, and any other ERP system.

We’re going to share with you the key terms to clarify in your contracts to avoid extra costs and substantial frustrations down the road.

What to Look for in an ERP

While no company has a crystal ball to know exactly what the future will look like, you do need to identify how you’d like your business to function over the next 10 years.

Why 10 years? Typical business roadmaps project as far as 3-5 years in the future. Most ERP systems relationships last a minimum of 10 years. You need to know how your business will function in order to know what you’d even need an ERP for and what it would need to do. You need to be risk-averse in your contract negotiation in order to cover your bases for what could happen.

Once you have your future vision in place, you’ll look at the supplier landscape. Compare what each of the top ERP systems providers offers and how it’ll meet your needs outlined above. Create a Supplier Decision Matrix and stack each contender against it to determine which is the best for your corporation.

Once you know which ERP software is right for your corporation, you’ll need to dig deep to really figure out the total ownership cost. This is the tricky part and is best handled through careful contract negotiation, financial analysis, and service management.

Key Things to Consider When Negotiating an ERP Software Contract

The contract is the most important factor when determining the total cost of ownership of the ERP and there are generally only two triggers for renegotiation once a contract is in place: mergers & acquisition activity and contract renewals.

Providers know that you don’t read ERP contracts every day. They design contracts in complex and ambiguous ways, which leads to more revenue for them—and more fees for you. Each of the following points needs to be specifically addressed and outlined in your contract to prevent your ERP from holding you ransom at various times over the course of your relationship.

Pay Attention to Intellectual Property Ownership

Many ERP contracts will state that any systems or processes developed while using the ERP are now Intellectual Property (IP) owned by the ERP provider.

We worked with a customer recently in the manufacturing industry. They had developed a process for creating their materials more efficiently going through the production line. According to their contract with their ERP provider, any process developed using the ERP software can be considered ERP owned IP. As such, we needed to carefully negotiate the situation with the ERP provider so as to not cannibalize the newly found process improvement which led to millions in positive P&L impact.

In a contract, you need to be very clear who owns the rights of process improvements as far as when it may directly or indirectly utilize an ERP system. Your ERP is the backbone of your business, and if properly set up, it touches most aspects of your business. Naturally, this complicates any opportunity to disentangle from that ERP. If Oracle, SAP or any other provider wanted to play hardball, they could say any process improvement that utilizes an ERP system could be co-owned or sole-owned by that ERP, and then they could take that process and sell it.

Make it very clear who owns what when negotiating your own contract. It needs to be clear that the client owns all IP that are developed for the benefit of their company.

Be Smart About Your License Cost Model

Everyone knows ERPs cost a lot. New contracts with smaller providers will often undercut themselves for the first year or two but will see a massive uptick in years 3-8 because the ERP knows it’s incredibly difficult to leave an ERP once you’re integrated into it.

The cost models of ERPs vary depending on the makeup of the customer’s business and what will be the most profitable for the provider. Some of the pricing models include:

Seat-based: Typically the number of humans who log in to the system. These licenses can be either Perpetual or SaaS based.
Site-based: Number of physical locations, etc.
Consumption Based: Number of processes, inputs, etc., into the tool.
Value Based: The newest model within the marketplace and yet the scariest of all. A cost associated with the perceived value of using the platform within your business.

Generally speaking, seat-based pricing is the most cost-effective for companies looking at ERPs, but this depends greatly on what your 5-10 year plan looks like to know which would be the most beneficial to you.

In addition to your unit cost, there could also be annual maintenance expenses. This acts like an annual expense and is generally a percentage of your perpetual license fee/net spend with the ERP. There are 2 ways to host an ERP system:

On-premise: Software that is loaded on the servers you’re in control of.
Software as a Service (SaaS): Software is hosted in the cloud by the provider.

Either way, you need to be careful how you license a product because if you don’t have control of consumption and volume-based metrics, it can skyrocket your costs.

Know Your Audit Rights

This is one that gets people in trouble a lot. Generally speaking, Oracle and SAP will not proactively limit access or connectivity to your ERP. This almost always is the responsibility of their customer, based on their unique needs. As such, these providers will contractually allow themselves unfettered access to your ERP environment with the intent of auditing the usage of their software.

The most common areas of audit risk are:

License compliance (Using more seats/volume/etc than you are paying for)
Architecture compliance (Too many API connections, etc.)
M&A compliance (Acquisitions, divestiture, subsidiary utilization)

It’s important to know there is intentional ambiguity by the software providers in how one could interpret contract language related to permissible use. Furthermore, we find that clients have no intention of noncompliance within any area but find it most difficult to monitor and govern the area of architecture compliance.

A common example of noncompliance is when a client links their ERP system to both development and production environments. Similarly, if an ERP is connected (in any way) to a client’s CRM system, it may also trigger a non-compliance event.

Providers are inserting audit right language within clients’ contracts (both new and old) providing the legal authority to conduct random audits of a client’s environment. They deploy both human and technical tools. The technical tools include running scripts that “listen” to your environment and create a report identifying potential non-compliance, which automatically places the client in a defensive position. Architecture-based non-compliance is most often the most profitable audit for a provider.

Another risk area is when your ERP is connected to other systems outside of your current infrastructure. Every time you make a connection between your ERP and another outside platform (often through APIs), the ERP provider may identify this as a missed charge and will charge you retroactively since the connection was initiated. This can easily develop into millions of dollars of new revenue.

The provider may also push value-based pricing by arguing that the API connections help you go to market faster, justifying an increase in your fee based on the perceived increase in value. Value-based pricing is risky because these providers can charge for new API connections, new acquisitions, product launches, and/or the output of the tool.

Don’t let a provider run a script inside your environment. If they don’t have access to your information, you’re in control of it and you remain in the driver’s seat.

Have Clear Merger & Acquisition Language

Put specific clauses in the contract that make it very clear what happens if you are acquired or if you acquire someone else. More often, it is the provider who offers this language, using very loose terms to say ‘if this happens, we will talk about it’ which leaves a lot of area for ambiguity.

To best prepare yourself for any situation, we recommend you place specific and measurable language in your contract that outlines the cause and effect for the most common situations. From a commercial perspective, this means having specific pricing thresholds.

If you are acquired, you take the better of two prices. You take the best price of both until you, as the newly combined customer, want to renegotiate.
If you are acquiring a company, insert legal language allowing you to renegotiate the contract immediately or simply adding the newly acquired entity into your existing contract with only a reasonable increase in fees.

You want to eliminate ambiguity. From a pricing standpoint, you want to make this as clear as possible.

Set Expectations About Subsidiaries

You also want to know the specific parties of the agreement. A common hiccup for companies is that they don’t have subsidiary language in their ERP contracts. A company like Coca-Cola, where each product line acts as its own subsidiary, could be in default of the contract by letting that subsidiary use your system without proper language.

This is something people don’t think about until your provider comes to you and says, ‘Hey, by the way, your other subsidiaries are using this ERP software. Happy you are doing it, but that is not part of your contract so here is a bill for another million dollars.’

Third parties—suppliers, vendors, non-employees—need to be defined in the contract as well. If third parties are allowed to act on your behalf, there shouldn’t be any additional fees for them to use your system.

Be Sure to Outline Price Protection

Another thing you need to consider when negotiating your contract is price protection. Generally speaking, companies don’t write in any sort of price protection year-over-year. What that means is that over the contract term, your ERP provider could change the price points of your unit costs at any given time.

It is not just about being clear about locking in your price at contract term, it is also putting a cap on the amount of increase that can happen at the next contract renewal, which needs to be aligned to the Consumer Price Index (CPI). A general rule of thumb is that the increase shouldn't exceed 3-5% at renewal.

Include Clear Terms Around Your Service Level Agreement (SLA)

An ERP is a critical piece of software for any corporation and yet we often don’t negotiate Service Level Agreements (SLAs). If ERP systems go down, it can shut down governments and grids.

Make sure that you have the best service level agreements and governance agreements by specifically outlining them in your contract.
There needs to be penalties for an ERP provider not meeting or exceeding the Service Levels you agreed upon. Hundreds of thousands of dollars are left out there because companies don't track failure.
You should put the onus on the ERP provider to send you reports of the performance versus making your employees have to monitor if it was working correctly. Make it the obligation of the ERP provider to know that there has been a breach in the SLA.

Don’t Forget Cybersecurity and Intrusion Detection

You need to be careful that if you get hacked, you don’t owe your ERP provider or are legally obligated in any other way to pay a hacking fee. This is called indemnification.

In matters of cybersecurity and hacking, your contract should stipulate that the ERP provider should be accountable, if possible. There should be financial and legal obligations, and your ERP software provider should be responsible for any sort of intrusion into the system—especially if it’s located in the cloud.

The concept being that if someone hacks your environment, the source code from the ERP could be opened to the black market for rip off and resell. People don’t look out for this enough and hackers are getting more sophisticated every day.

Know the Rules About Implementation Partners

Implementation partners are third parties that will help develop custom code on top of the ERP system for your business.

Most of the time, your contract states that any implementation partners have to be registered as “Preferred Providers” for your specific ERP software. It is a contractual risk to your company if your contractors are not certified by your ERP provider.

Your E-Commerce System Needs to Play Nice

If your company is in e-commerce, you need to make sure that there is an active and working connection between your ERP provider and your e-commerce provider.

Many ERPs will tell you “Don’t worry, we will make a connection.” What they won’t tell you is that the connection they make will cost YOU more money. Your contract needs to dictate who is accountable for paying for any connections that are required for your e-commerce platform and your ERP system to play nicely together.

We always make the new piece of software that is connected to the ERP system pay for the API. It is the third party’s cost. That basic API connection should not be your cost to maintain and pay for—stipulate in the contract who is responsible (ideally the third party) ahead of time so you aren’t stuck with a huge bill.

Make Sure You Have Coterminous Contracts

Another big thing to look out for is coterminous contracts. In most large companies, each department will have separate contracts with an ERP provider and these contracts won’t align on the same termination date.

This is the biggest trick in the book. It creates massive chaos because you can’t get everyone on the same page and forces the client to align internally at multiple times throughout the year. Clients typically lose 10 - 20% when they are in a non-coterminous environment.

If you are subject to a non-coterminous environment, the ERP provider is in the driver’s seat. They will divide and conquer you, negotiating at a business unit level versus an enterprise level. At the enterprise level, you have the volume and leverage to get better terms which typically drives an additional 10-20% in value.

In Conclusion

Whether you’re negotiating an initial contract or a renewal, make sure you develop and maintain a total cost of ownership view. First, make sure you understand how your business will be growing over the next 10 years. Then, dissect the contract so that you better understand the unit cost and connection fees.

In the contract, lay out all potential possibilities early as opposed to being forced to react to them as they come along. The more prepared you are, the better you’ll be able to handle surprises, pivots, and conflicts. Make sure that in the contract, each of the specific points outlined above are detailed with zero ambiguity. Hit all these points as a minimum.

The truth of the situation is that the sales representatives at these ERP providers know you aren’t negotiating an ERP contract everyday. It’s important to understand how to protect your company. Keeping these points in mind will help you to protect yourself and your company.

A 3-Step Process to Reduce Your IT Spend 25% Or More

In the latest meeting with your company’s executives, the ultimate goal was the same as ever - increase revenue, decrease spend. Do more, with less.

Your directive is to find a 10% cost savings in the next year and you are looking for some quick, streamlined ways to achieve that goal.

Have you taken a good look at your current contract situation? Where can you find savings in the software and products you’re already paying for?In this article, I’m going to share how you can create a system to manage and optimize your current (and future) IT contracts. By taking these steps, you'll achieve the best cost savings (often upwards of 25%) for your company.

How do you manage & optimize your current IT contracts?

To optimize your IT spending, you need to get organized. Tons of contracts are flying around and you have to know where you’re starting from today to be able to optimize for the future. You have multiple contracts with each supplier you work with. Each product you buy from them throughout the year has its own legal commitments: Master Service Agreements (MSA), Statements of Work (SOW), order forms, etc. Each supplier has a number of IT contracts they use with their clients. Any of these types of contractual documents probably have different commercial language. And they all add up to time and money obligations for you.The worst part? Almost none of these contracts will be co-termed. Regardless of the company they’re with, each contract will have a different term period. Some of them will be for six months, a year, eighteen months, what have you. This creates mass chaos and it’s all by design. In order to get out of that chaos, you need to get above it - get a bird’s eye view of the landscape of your IT contracts. This can be a very arduous process but the payoff is huge. Take the time to align each of the contracts so you can properly optimize around them.

Step 1: Create an Asset Inventory List

If you don’t have a contract management system - and most companies don’t, even the biggest ones out there - you need to create an Asset Inventory List.Basically, list out all your suppliers and all the IT contracts. You need to be clear on what contracts you have with a specific supplier. You can do this with a fancy Excel spreadsheet like the one I’ve created below. You can download this template for your own use.

Essentially, this list will have the vendor name, contract type, contract term, and price. Consultant groups charge millions for this fancy spreadsheet but you can create one yourself from my free template. Through this process, you’ll identify 2 things:

How much you’re spending every year.
How many IT contracts you have with each supplier.

With this information, you can tackle the next step. You now know what contracts are coming up for renewal and when. You know the negotiation period and can bring in extra help in advance to work through that process. And finally, you can now work on co-terming all the order forms and SOWs. These adjustments create more administrative ease versus the chaotic burden they’re designed to be. Once you’ve got a survey on your IT contract landscape, you can move on to Step 2.

Step 2: Analyze Each Supplier Against a Right Size/Right Price Matrix

Start with the suppliers that are your biggest spend items. These will most likely be your ERP provider, your Microsoft Office contract, and your CRM software. Do an internal assessment of these suppliers and determine:

How much you’re spending;
When you’re going to renew; and,
What you’re planning to do in the future.

This will help you determine that you are, in fact, only paying for the items that you need versus those that you don’t. All too often companies are paying for products that they aren’t even using because they don’t have a handle on their contracts. The second thing you’ll be able to keep an eye out for is whether you’re paying for the right license types or not. Challenge your company to look at ways you can downgrade your subscriptions. The third piece of knowledge you’ll gain from this process is figuring out which business capabilities each supplier is supporting. You’ll be able to see which suppliers are overlapping functionalities. This overlap is common in decentralized organizations. Each business stakeholder wants to use the software they’re familiar with even though three other companies provide the same capabilities. Your corporation is likely spending way too much on overlapping suppliers that provide the same digital capability. Paying for software you’re not using is called shelfware. Don’t make the mistake of paying for shelfware. You need to start this internal assessment process six months before your next contract renewal. If you don’t, you’re going to be playing catch up to these large suppliers because they know more about you than you do.

Step 3: Preparing for negotiation

Create your negotiation team

Your negotiation team should consist of 3 different roles: a business stakeholder, an IT stakeholder, and a negotiator. Sometimes this last role is procurement and sometimes it involves an outside advisor.

Gather benchmark data

In addition to your negotiation team, you’ll need some hard-to-find information. One of the biggest pieces of leverage you can get is benchmark data. This data gives you the prices other firms are paying for the same service. There’s no way your company can know what other businesses are paying unless you bring in an external advisor like The Negotiator Guru.

Create an opportunity analysis

You can analyze your rates against the benchmark to find out how competitive your prices are compared to your industry peers. Similarly, you can analyze your supplier performance metrics, Service Level Agreements, governance process (etc.) against benchmark data to find out how well your suppliers are performing. And finally, you can analyze your Innovation Quadrant against the benchmark .How is the supplier driving new ideas, new concepts, process improvements, etc? How are they incentivized to drive cost savings for YOUR company through their relationship with you? For example: If you’re using a company like Accenture to run your help desk, there should be a clause in the contract for a 10% target cost savings over the contract term for the services they provide. They do this through process improvements and through automation. This ensures they are actively working toward providing your company with cost savings to make your business more efficient.

Create a Roadmap of Initiatives

This roadmap has the intent of prioritizing your initiatives to ensure you’re targeting the greatest impact that will take you the least amount of time. Of course, not all initiatives will be easy to achieve but taking a systematic approach to what you work on first is paramount to your success. To assist with this approach, we suggest categorizing your initiatives so that you can easily sort and isolate the opportunities in front of you. Categories you might consider using include “Quick Win, Strategic Sourcing, and Business Transformational.” Naturally, the progression of cost savings usually increases in scope and impact as you move from Quick Win opportunities to that of Business Transformation. After you perform your opportunity analysis, get your benchmarks, and create your roadmap of initiatives, you can then pull together a Heat Map. This entails creating a visual graph that clearly identifies the sequencing opportunities. Here is an example of one of these Heat Maps:

Being proactive with IT contracts can save 25% annually

A stellar negotiation team together with your benchmark data and forward-looking road map will give you a clear direction during the renegotiation process. Centralizing, and subsequently renegotiating, your contracts with this approach generates on an average 25% P/L cost savings for your company (industry agnostic).

A decentralized company can cost you extra money

If a company has multiple business units and/or sites that are responsible for their own procurement you will undoubtedly have an unstructured supply base. The downstream effects of this situation is that you will have overlap in your supply base, duplicative digital capabilities, and a rats nest of contracts causing incredible inefficiencies and unleveraged spend. For example, if one branch is using DocuSign for e-signatures and another is using Panda, this is a digital capability overlap that can easily be eliminated.After your company streamlines your digital capabilities, your company should be able to easily consolidate spend, processes, and contracts. Once you remove the redundancy and get everyone on the same software, you can also negotiate a single contract for your company that drives immediate cost savings and long-term cost avoidance.

IT Contracts create both opportunity and risk in Merger & Acquisition transactions

When combining companies, it’s important to do both a top-down and bottoms-up approach to identifying synergy opportunities within your IT spend. Top-down approaches involve a lot of financial synergy assumptions based on similar transactions within your industry. These approaches largely identify duplicative roles, processes, etc. and identify a financial target for savings. This approach naturally takes a high-level approach but doesn’t consider the unique needs of your business. To accurately forecast synergy opportunities it should not be the only synergy view to consider. Bottoms-up approaches, on the other hand, allow you to co-create opportunities with your l business stakeholders that consider business risk, culture, and ease to achieve. I’ll provide more insight on how to properly prepare for a merger in a future article.

Wrapping It All Up

Follow these steps to properly optimize your current contracts:

Identify your current state situation.
Identify your high-spend suppliers.
Gather benchmark data to see how your contracts stack up.
Run an Opportunity Analysis to determine overlap and shelfware.
Create a negotiation team.
Optimize each contract as its renewal period approaches.