Understanding Microsoft’s Negotiation Strategies

Most companies are paying 20-50% more than they should be on their Microsoft contracts. In this article, we are going to walk through what you need to know about negotiating with Microsoft, as well as specific tactical levers you can use to reduce your Microsoft contract by up to 50%.

8 Important things to note when it comes to negotiating your Microsoft contracts:

Your sales rep has two key drivers: to get your company to adopt Azure and to sell you an E5 license.
The Business Desk makes all of the final decisions regarding price, etc.
The Divide and Conquer approach is still the most common tactic to drive sales.
Microsoft’s fiscal year strategically ends on June 30th so they can capture multi-year budgets from their enterprise clients.
Putting a price cap on a specific product does nothing to ensure your company’s rates because Microsoft changes product SKUs so regularly that your price cap will be null and void the next time you go to negotiate.
Make sure that you have the appropriate affiliate language to ensure your entire company can use the products the right way.
Consider whether your company would benefit from a Microsoft Products and Services Agreement (MPSA)
If you’re switching from a Perpetual Agreement to an Office 365 contract, you have the opportunity to capture the lowest price you’ll ever receive from Microsoft.

Is this article we'll cover all those points in depth so you can understand Microsoft's negotiation strategy.

What you need to know when negotiating with Microsoft

Microsoft has a footprint in nearly every established company in the world. The Microsoft Office Suite revolutionized the way we work since nearly the beginning of the internet. While the company has experienced both successes and challenges in its history, Microsoft has profited as a result of two primary factors: 1) a good product, and (equally as important) 2) a great enterprise sales team.We’ll spare you a history lesson about Microsoft here but it’s important to recognize and respect the strength of their first mover advantage and subsequent (now legacy) footprint. This history has allowed Microsoft to be a fast follower with adjacent technologies within the marketplace. In other words, Microsoft monitors new concepts and technologies in the marketplace prior to investing their own resources. This strategy has largely worked over the last two decades as Microsoft will simply build or buy a proven technology stack that has proven successful and plug and play into their existing customer base. Fast forward to present day, Microsoft Enterprise continues to be a fast follower within the marketplace. Their legacy footprint has allowed for continuous introductions of new technologies to their existing client base. Software as a Service (SaaS) solutions has significantly lowered the barrier to entry for new technologies to be introduced to their client base. This has created a new dynamic for Microsoft as it now employs tactics to eliminate competing technologies within its legacy client base. We will discuss these tactics in further detail within this article.

How Microsoft's pricing model has evolved

Up until 2011, Microsoft’s primary revenue stream originated from 1) net new technology sales and 2) maintenance fees. The new technology sales were largely on-premise meaning the software would be installed within a customer’s server environment. For those existing customers, Microsoft earned an 18% maintenance fee (calculated from the original purchase price) simply by pushing technology upgrades to the customer. This maintenance fee was largely recession proof as companies largely paid for upgrades thinking they were required but rarely ever installing the actual upgrade. As the market evolved into a SaaS based consumption model, Microsoft introduced Office 365 to drive predictable monthly revenue from their customers. This new pricing model has transformed its business and propelled its revenue. This evolution has allowed them to push adjacent SaaS services to their clients such as cloud storage, security services, etc. Because they are now training their clients to purchase software on a subscription model, it’s easier for Microsoft sales representatives to upsell other products. Knowing how a sales rep is incentivized and how they think will allow you to make the best decisions for your company and negotiate effectively. Through our active Microsoft negotiations across a wide variety of companies, we have a constant pulse on which products Microsoft is currently incentivizing. This can help you gain significant leverage in your negotiation.

What is your sales representative's role in a Microsoft Negotiation?

Your Microsoft sales representative’s primary job is to gather as much intelligence as possible from your organization’s stakeholders in the interest of finding new products and services to push into your organization. On the contrary, your goal is often to control and/or reduce expenditures for your company. This means your intentions are automatically at odds. Based on the new dynamic landscape within the marketplace, Microsoft Enterprise is now focused on eliminating any competing solutions from their customer’s technology stack. As discussed previously, Microsoft’s acquisition strategy has largely been focused on those technologies which have developed a large footprint within their customers. Your Microsoft sales representative is highly incentivized to eliminate competing software from your environment and will make the case that you are able to achieve cost savings by simply eliminating these competing solutions. At face value this sound nice but in practice it’s rarely ever true without proper negotiation support. While there are some benefits to centralizing your technology through a single source, rarely is cost-savings one of those benefits. The cost savings presentation sounds well and good, but it often doesn’t lead to any actual value-capture benefits for companies. Instead, Microsoft gains a larger share of your technology stack and, with it, more negotiating power. We’re seeing this increasingly with the promotion of Azure, their cloud solution, Power BI, their analytics tool, and anything machine learning and/or artificial intelligence related. These priorities will change as new products are developed but the principles are the same. Within the last 2 years, Microsoft (like Google and their G-Drive) has started to build technologies that are reliant on the Azure platform to work properly. This forces companies that were not originally interested in Microsoft Azure to introduce the capability into their environment. Microsoft is hoping that your storage requirements grows both organically and inorganically. Based on polling, we find that 87% of Microsoft customers expand their utilization of Azure within 2 years after the technology is introduced into their organization. This is complemented by the fact Microsoft, Amazon, and Google have made purchasing storage so simple and commoditized that anyone with the organization can do it. This is literally the ideal situation for Microsoft. From an Office 365 perspective, your sales rep will want to push you toward an E5 license. This is their highest tier license for enterprise customers. Naturally, this is also their most expensive product which drives the greatest sales incentive for your sales representative. To summarize, your sales representative’s top 2 priorities are:

Get your company to adopt Azure.
Get your company to purchase an E5 license.

What is the Microsoft ‘Business Desk’?

While your sales rep (i.e. “Account Executive”) and their management (i.e. “Vice President of xyz”) will be your primary point of contact, they have very little decision authority once it comes to rate adjustments.. That’s where the “business desk’ comes in. Microsoft has been testing, validating, and refining this concept for years and they’ve got it down to a science. The ‘business desk’ is the Bad Cop to your seemingly accommodating sales rep’s role of Good Cop. The sales rep portrays a helpful, eager personality but they can’t finalize any decisions that actually affect your rates. The business desk contemplates their options, makes decisions, develops the basic communication plan, and informs the sales reps next actions with you, the client. If you want to get the best rates possible for your company, you need to train your sales rep on how to interact with and communicate with the business desk on your behalf. With the right combination of messages and timing you can meet or exceed your negotiation goals.

They Will Try to Divide and Conquer

The Divide and Conquer tactic is widely known as one of the oldest plays in every enterprise sales playbook. The tactic has been used for years across all industries as it continually proves to be successful in driving more revenue. Your Microsoft sales team will build relationships at multiple levels of your organization to learn more about the potential software needs of your organization than you do. They will use this information to introduce products and services to different levels of the organization to create buy-in and acceptance prior to any negotiation officially starting. If you are a sizable account with Microsoft ($1M+ per year) you will also have some executive attention within Microsoft. This team will naturally want to engage with your (the customer) executive team to “gain alignment.” While executive relationships between your two organizations is not always a bad thing, it’s important expectations are carefully managed so that your executive team doesn’t agree to products or services you may not actually need. It’s best to create a negotiation plan that includes how and when your executives will communicate with Microsoft (if at all). We have found that the large majority of our executive clients have an interest in participating in the negotiation. It’s important you include them in your communication planning so that they too can be empowered to participate within the guidelines you establish for them. As for the rest of the organization, drive alignment across all your stakeholders within your organization early and often. Make sure everyone is on the same page about your needs, your budget, and your forward-looking initiatives and business plans. You need to get clear on what you need and when you need it. If Microsoft is successful in their Divide and Conquer technique, they’ll tell you the answers to these questions and their answers will be an over-inflated version of what you would develop internally.

Microsoft Contract Language Risk Mitigation

What is Microsoft's Fiscal Year?

Like Salesforce, Microsoft does not follow the typical calendar year in the interest of accessing two corporate budgets. Microsoft’s fiscal year ends on June 30th of each year. They do this in order to split their software expense across two corporate budget years to capture 1) end of year funds and 2) new budgets from their clients before they spend it.

Quick Win: How to properly negotiate Price Caps

Often we find clients have negotiated a price cap on specific products rather than on the total spend of the contract. While price caps are well intended by the client, the problem is that Microsoft literally invented the concept of price caps in the early days of enterprise agreements to overcome buyer reservations. Microsoft subsequently defeats these protections by simply changing product names and SKU numbers on a frequent basis. In other words, if you put a price cap on a specific product during your negotiation, that product will almost certainly have changed at the time of your renewal in 1, 3, or 5 years which effectively negates any protection intended by the customer. Instead of placing a price cap directly on defined products, we recommend you establish protection based on the total spend of your contract.

Affiliate Language

Ensure that you have proper affiliate language in your contract. This means that multiple different subsidiaries of a company can use the same license versus having to have their own separate contracts. We’ve seen this trap laid in a few different M&A situations, specifically.

License Floors

In the world of business, it’s common for software companies to acquire or divest business units on a regular basis. Especially with our private equity clients, adding or removing thousands of employees each month is not uncommon. Frequently, the contract will state that a certain amount of licenses allows for specific price reductions. With companies changing size and needing different licenses so frequently, this can be a problem. It’s important to create the lowest floor possible so that you aren’t hit with any penalties and avoid renegotiation triggers.

Areas of Opportunity

As with our Salesforce negotiations, we help our clients determine both the Right Size and Right Price approach for their specific needs. While companies like Gartner provide a wealth of information with tactics and general rate benchmarking, we recommend narrowing down the data to determine which companies are your closest peers in terms of industry, size, AND annual spend.

Obtain Net New Products at Very Reasonable (or Free) Prices

Showing interest in the incentivized products we mentioned earlier can reap huge rewards for your company. Use these products to drive cost savings within your core product baseline costs as well as to add new digital capabilities for little to no cost.

Don’t Over-License

In order to know what software license type you require, you need to have a clear understanding of how different stakeholders within your company are going to use your various Microsoft products. Develop no more than five personas for your organization based on how you’re going to use the platform. These personas will inform your license strategy. Within our Right Size process we start by isolating the core functionality utilized by each persona and then matching that to the capabilities available within the various products. Using the Microsoft Office 365 Suite as an example, your Microsoft sales team will almost always recommend purchasing the E5 license for your organization as it offers the greatest capability, protection, etc (blah, blah, blah). Rarely do our clients ever need the E5 license (only 5% to be exact). In fact, most organizations don’t even use the full capability offered within E3. This is why it’s so important to develop specific personas based on utilization within your organization. In a perfect world, you would be able to assign different license types based on the unique demands from each of your personas. In other words, it’s very common for the output of our Right Size assessment to suggest E3, E1, and K1 (yes, there is such a thing) within a client’s environment in the interest of driving the lowest total cost of ownership (TCO) with the greatest digital capability. The simple act of selecting a lower license than the E5 (if appropriate) can save your company 60% or more. Another example of successful Right Sizing is the isolation of shared computers. Within the manufacturing and healthcare industries, there are often shared computers that are available and used by multiple employees. Microsoft’s standard approach is to license each individual person in the company with an individual license. If you have shared computers, instead of licensing each individual you simply need to license each shared device. You can purchase a restricted use license with a desktop version for Windows and Office. For example, Instead of five employees being assigned five individual E5 licenses, you now have a single low priced license that meets their needs. Another restricted-use license includes having an “email only” license for those that don’t need a computer but just want access to work email from their own devices. In other cases, we’ve helped some clients realize they don’t need Office 365 at all and they can simply stay with their perpetual license. License types truly depend on the client and their individual needs.

Get an MPSA

During your renewal you should take an inventory of your multiple agreements (servers, office products, etc.) and explore the benefits and risks of combining under one agreement called the Microsoft Products and Services Agreement (MPSA). The MPSA acts as a parent to the child agreements for your individual products and services and makes for an easier and more streamlined contracting experience down the road for all involved. Historically, your Office products are on an Enterprise Agreement while the infrastructure products are on a Server & Cloud Enrollment (SCE) Agreement. The more you can consolidate and co-term your agreements, the more leverage you’ll have. You’ll be able to negotiate the entire consolidated contract with the “business desk” versus two or more separate, and distinct contracts.

Microsoft Agreement Overview negotiating with microsoft

What you need to know about converting from a perpetual license to a subscription based license (Office 365)

If you’re converting from a perpetual license to an Office 365 contract, you have a huge opportunity to capture the lowest price point you’re ever going to get from Microsoft. This conversion is its own license - it has its own SKU. The reason for this is that you’ve already paid for a part of that license through your original perpetual license purchase. If properly negotiated, the cost for this conversion license should only be the difference between the upgrade cost (current version to new) and your original cost. Most Microsoft customers don’t know about this opportunity and let this massive cost avoidance opportunity slip through the cracks never to be seen again. For context, the price difference is about 50% and it will be realized year-over-year. If properly negotiated, you'll reap continuous benefits from this opportunity.

FAQ's

‍What is the difference between Microsoft E1, E3, E5 licenses?

The difference between a Microsoft E1, E3, E5, and K1 license is in capability. The primary differences are:

The number of Microsoft apps you can access;
If you have download rights; and,
If you can download the application (desktop version) versus online only (web browser access).

Microsoft Office 365 E1 is your “lowest” level license for the Microsoft Office Suite via web browser access.

‍Microsoft 365 E3 is your basic mid-level license which includes additional applications and allows users to download desktop applications. This by far the most common license for all enterprises. Microsoft 365 E5 is your highest level license which includes your core apps, download rights, and specialized apps like Advanced Threat Protection (ATP), etc. There are several other core licenses (suck K1, F1, Desktop Only, etc.) which can, and should, be used to lower your Microsoft spend. For most organizations, an E1 or E3 license will satisfy most of your end-users requirements. Can I mix E1, E3, and E5 licenses within a Microsoft contract?

Microsoft 365 E5 is your highest level license which includes your core apps, download rights, and specialized apps like Advanced Threat Protection (ATP), etc. There are several other core licenses (suck K1, F1, Desktop Only, etc.) which can, and should, be used to lower your Microsoft spend. For most organizations, an E1 or E3 license will satisfy most of your end-users requirements.

Can I mix E1, E3, and E5 licenses within a Microsoft contract?

While most companies who are longtime Microsoft users understand that you can mix several different products and services within an Enterprise Agreement, many aren’t aware of the fact that you can mix and match different license types for your core licenses as well.

In a well negotiated (and proactively managed) Microsoft contract, it’s very common for different persona groups to leverage different core licenses in the interest of Right Sizing™ your environment.

For example, a persona group in your company may use an E1 license, and then a different persona group (such as your IT department) may use an E5 license, depending on their use case.

If you are not mixing licenses at the moment, then you are likely paying for capability you don’t need for a subset of users who do not need the fully upgraded licenses.

How do you know what Microsoft license you need?

The easiest way to figure out what you need from a Microsoft license perspective is to hire an outside advisor to help you with that analysis.

It is much faster to hire someone who looks at licenses all day and can match up your needed capabilities with the ideal license type.

If you are going to do this yourself, the best way is to dive deep into the spec sheets on the license pages for each license on Microsoft’s website.

It is also very important to conduct a persona analysis inside of your organization if you have not already done so. This is a simple process.

Identify 1-5 personas within your organization who use Microsoft products. These would be different individuals who use Microsoft in different ways.
Identify the specific needs and wants of each persona group as it relates to Microsoft.
Match each persona’s needs and wants to the best fitting license type for that persona group.

This is part of our Right Size™ secret sauce at The Negotiator Guru and how we help our clients reduce their spend with Microsoft.

What does the Microsoft contract structure look like?

The Microsoft contract structure is a constantly changing evolution. Historically, Microsoft has had Enterprise Agreements, Master Service Agreements, and supplemental terms and conditions that are unique to a specific product set. Historically, these have all acted as individual contracts. What Microsoft has done over the last 3-5 years is rolled all of their contracts into the Microsoft Products and Service Agreement (MPSA). It is a contractual container for these existing MSA’s, EA’s, and supplemental terms and conditions.What you want to do is be very careful when Microsoft is asking you to sign brand new agreements. More often than not, you are actually in a better contractual position by using your existing MSA’s, EA’s, and Supplemental Terms and then attaching that to the MPSA.

This is especially important because Microsoft is trying to move users to accepting online terms and conditions. While that may seem like a convenient aspect to contract management, with almost all of these online terms and conditions, there is a clause that allows them to change those terms and conditions at their will.

If this is not actively managed, changes within online terms and conditions can lead to unknown legal and/or commercial risk. We have many clients that engage us after they discover (either voluntarily or involuntarily) that they are out of compliance with their contract. The result can come in the form of an unbudgeted expense, lawsuit, and/or customer loss.

This is why it is extremely important to memorialize your specific contracts with Microsoft as much as possible...you can still do so within the new MPSA structure.

As you can see, contracts with Microsoft can quickly become complex which is why it is helpful to hire an outside advisor like The Negotiator Guru. Contact us today to discuss your Microsoft agreement.

What Microsoft products give me leverage in my negotiation?

There are certain Microsoft products that give you leverage in a negotiation with Microsoft. The short answer is that any product or service they have recently introduced to the marketplace (generally within the last 6 months) will provide amazing leverage for you.

The Microsoft sales team is highly incentivized to sell new products into existing accounts at renewals.

What is the typical term of a Microsoft contract?

A typical term of a Microsoft contract ranges anywhere from 3-7 years. The most common is 5 years with multinational enterprise customers.

For companies ranging from $5B-$15B in annual revenue, Microsoft will often do a lot of 1-3 year agreements.

For companies under $1B, Microsoft will often structure annual or month-to-month contracts.

Can you renegotiate a Microsoft contract early?

Yes. When you renegotiate early it is called an “early commit.” That being said, it’s important to note that not every early commit contract will provide value for the end customer. It’s very important that you hire an advisor like The Negotiator Guru to help you analyze the cost/benefit analysis of a new deal.

What are key risks of a Microsoft contract?

There are numerous risks that Microsoft customers can experience depending on what their environment looks like both in size, scope, and geographic footprint. One of the most common risks for all customers is the ability for Microsoft to audit customers. This is very similar to other software providers such as Oracle, SAP, Salesforce, etc. For a specific assessment of your contractual and/or technical architecture risk you’ll need to leverage an advisory firm like The Negotiator Guru.

To be clear, The Negotiator Guru does not provide 3rd party maintenance services like that of a Rimini Street but rather senior expert negotiation services. The two capabilities are very different and distinct.

Understanding Microsoft Audit Rights

Microsoft Audit rights typically emerge when you have any sort of restricted use license or on-premise architectural limitations. Related to the restricted use license, this is generally a custom made license for your company to serve a specific internal use case. These are negotiated licenses with Microsoft and can drive significant cost savings if used, and managed, correctly.

If you as the client don’t have a software asset management team, or the equivalent responsibilities assigned internally, then there is an increased risk that you’ll be audited and fined.

This audit risk typically comes up 6-8 months before your contract renewal. This is done by design by Microsoft to gather leverage for the upcoming renewal negotiation. In general, Microsoft will sometimes let audit compliance fees slip in exchange for new products and/or services within the customer’s renewing contract. Remember, this is largely driven by your account team who are highly incentivized to drive new product/service additions to the existing customer base.

Another typical resolution for compliance risk will be a required license upgrade which in turn satisfies your account team’s desire to increase their revenue of your account as well.

Are payment terms on a Microsoft contract negotiable?

Yes. Payment terms are negotiable.

Several years ago, Microsoft made a partnership with the banking sector to provide bridge financing. This makes it quite easy for a client to leverage payment terms of 180 days instead of the standard 30 days via their value added reseller (VAR).

You have the flexibility on payment terms. Simply ask Microsoft for the flexibility, and they will put you in touch with one of their payment partners like PNC Bank. The Negotiator Guru also has finance partners that allow our clients to extend their payment terms for any software contract including, but not limited to, Microsoft.

Can you change payment terms on a Microsoft contract from annual to quarterly?

Sometimes is the appropriate answer here. Depending on your specific situation, you may be able to change your payment terms from annual to quarterly or monthly.

Who has decision making authority inside of Microsoft and why?

There are multiple levels of decision making authority inside of Microsoft. That is purely by design. The decision making largely depends on the annual contract value of your new and/or prospect contract with Microsoft. Subsequently, the decision making rights change depending on if you are a new customer or a renewal customer.

For the purposes of a renewal, the primary decision maker is the business desk. This is a specific group inside of Microsoft that is meant to handle your renewal from end-to-end.

The business desk is incentivized to keep your revenue flat as their worst case scenario. Your account team is presented with a 10% revenue growth target for each of their accounts. If they are unable to satisfy this target, they will refocus their energy on those accounts where there is growth opportunity. At such time, they will hand off the deal to their renewal team at the “business desk.”

The business desk is essentially a sales enablement team in the background supporting your account team and driving the deal from behind the scenes.

To bypass this, you should aim to incorporate the business desk as part of your negotiation. This helps eliminate the extra step of the business desk being separate from your deals and improves the outcome of your negotiation.

The other thing you can do to improve your negotiation, and achieve better decision making authority, is to require a sales executive sponsor from Microsoft to join in on your negotiation. For example, if you spend $5M+ per year with Microsoft, you should require an SVP from the sales organization within Microsoft to be part of your negotiations.

With that type of connection, you can pass through a lot of back and forth and get to the bottom line much quicker.

When you have a high level sponsor involved in the deal, this enables you to exchange value in different ways with Microsoft such as collaborating on white papers, case studies, or structuring deals to work with Microsoft's innovation team, or test new products. Having a high level sponsor enables all of these additional leverage points to be brought into a negotiation.

The Bottom Line

Microsoft has a deliberately designed sales process and most companies are so entwined in their products that they readily accept new subscription charges and upgrades without digging deeper into their specific needs.

Our goal here is to help educate you on the best practices for negotiating with Microsoft. If you have additional questions or want to see more articles like this - whether for Microsoft or other SaaS companies - let us know so we know where to prioritize our focus for future articles.

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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.