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

Software Audits from Oracle, SAP, Microsoft, and Salesforce: What You Should Know

Getting an audit notification from your software provider can be nerve-wracking, but after reading this you’ll realize this is less likely due to something you’ve done wrong and more likely a tactic to throw you off-course.

If you’ve never been through an audit before, you don’t know what to expect, what to do, or how to make sure it’s over as quickly as possible with minimal expense to your organization.

In this article, we’re going to make all this crystal clear by outlining the audit processes of large enterprise software providers like Oracle, Salesforce, SAP, and Microsoft. There are a few key things you need to take into account that apply to all of these providers: ● Use your contract as your best weapon to defeat audits. Take action if there is any sort of grey space in terms of what is allowed by the supplier.

Use your contract as your best weapon to defeat audits. Take action if there is any sort of grey space in terms of what is allowed by the supplier.
You’ll do best if you bring in outside assistance. An expert who has experience guiding businesses through software audits will be a huge help throughout the process.
You need to control all the information that is shared with the supplier in your own format and spreadsheets.
The more you are proactively sharing information with suppliers, the less basis they have to bring up an audit.
Audits are brought forth to customers for many commercial reasons. The more proactive you (the customer) are with sharing information, addressing audit risks in meetings, and creating a paper trail, the less likely your supplier is to audit you.

What is a Software Audit and How Did Your Company Get Selected for One?

A software audit is both a technical and contractual review of your organization’s use of a specific software platform within your IT environment. Most large enterprise software companies like Oracle and SAP have separate departments that focus purely on license compliance audits. These teams look and feel like a shared service organization inside of a large software company. They work with a customer’s account management team to take an aligned, yet separate and distinct, position on behalf of their software company. We will discuss the similarities and differences between these different teams later in the article. One common similarity across all of these suppliers is that the audits will compare your usage and processes to any specifications, standards, or contractual agreements in place.

Why your company? Why did you get singled out for an audit?

There are three primary operational/contractual triggers for a software audit:

If there is any sort of consumption-based pricing in your contract;
If you have any sort of restricted-use license in which you are only allowed to use a license for certain functionality; or,
If you have recently acquired or divested a company.

While not mutually exclusive, you’ll also find the timing of these audits is very suspect and robotic in nature. The two primary timing triggers are:

Anytime a large software company needs to identify “unearned revenue” to meet quarterly revenue targets; and,
A pending contract renewal.

These large enterprise software companies know that it’s very common for their customers to be out of compliance due to the sheer size and scope of their operations. This is augmented by the fact they know anytime there is employee turnover within a customer’s IT organization (especially their “software asset management” department) the company is susceptible to additional compliance risk as a result of lost tribal knowledge of the environment, past internal audits, etc. Taking all of this into consideration makes it relatively easy to understand why a company like Oracle can confidently predict net new revenue from their existing client base. In addition to market pressure for additional revenue, a customer’s upcoming contract renewal also serves as an all too common trigger. The general rule of thumb we tell clients is anytime you have a contract renewal coming up nine to twelve months, your supplier is likely to introduce an audit. Your supplier will use this as an opportunity to distract you and gain the upper hand in an anticipated contract negotiation that hasn’t even started. Suppliers do this because it automatically puts you in a defensive position. Naturally, you will be forced to concentrate on defeating the audit instead of allocating that same time to figuring out what you need for the upcoming contract renewal. They want to gain as much leverage and understanding of your business as possible before going into a renewal negotiation. The audit is merely a tactic large software providers use to 1) seek out unearned revenue for their company to meet revenue targets and 2) gain the upper hand in your contract renewal negotiations in the hopes of minimizing any revenue loss from your account. The fact of the matter is that it’s very common for customers to be unintentionally out of compliance. Knowing this, it’s important you know what to do in order to defend your company from what is potentially a very costly situation.

Here’s an example to help illustrate this tactic

By way of an audit, an ERP provider could discover you are misusing the license, giving the supplier reason to charge you a larger fee. Often, sales revenue targets for these audits are about 30% of your annual maintenance/subscription costs. Let’s say you are spending $1M on core licenses, the audit will likely lead to around $300k in costs on top of that. If you can defeat the audit and keep your core license costs at $1M, then you will be happy and reward yourself for fending off the extra charges. In reality, the supplier didn’t expect the $300k in the first place, the audit was just a way to distract you from putting time and effort into your upcoming renewal negotiation. It’s a win-win situation for them - if they win the audit, they put the money towards their sales revenue to meet their quota; if they don't, they’ve distracted you from being prepared to save money on your upcoming contract negotiation. As a sales rep, finding new business is much harder than auditing an existing customer. Suppliers will target big companies because they don’t have perfect internal controls and mistakes are likely to happen.

What to Do When You Get an Audit from Oracle

When Oracle conducts an audit, they engage their License Management Services (LMS) team to run the process. The audit process often involves installing software code within your secure environment. It is a listener software that will hit your mainframe servers and figure out how many other systems are connected. This is important because, historically for this on-premise software, you are licensed based on the interconnectedness of both physical and virtual server environments. Your supplier wants to know how much “value” you are getting from their platform so the software they install provides a report of how many systems are interconnected. In a nutshell, the software delivers a report that illustrates when your technical architecture is in non-compliance. This automatically gives Oracle the upper-hand as it forces the customer to validate the information. The best tactic to defeat this process is to never allow the software in your environment to begin with. You have the right to refuse listening software within your Oracle contract. Unless your contract explicitly calls out installing software, tell Oracle that installing software does not comply with your IT security protocols. Look to determine if you have audit language specified in your contract. The older the contract you have with Oracle, the more likely you have the right to refuse the audit, or to at least not allow the listener software to be installed within your environment. If this is the case, tell Oracle that instead of installing the software, you will run the audit yourself using their tools and spreadsheets with no software included. This means you are in control of what information is being shared with Oracle. Controlling the information is incredibly important in any audit, especially when suppliers are involved.

What to do when Salesforce Conducts an Audit

Salesforce audits customers when there is a restricted-use license available. When this happens you need to think critically about negotiating with Salesforce. Salesforce is Software as a Service (SaaS) in the cloud which means they have more ability to freely monitor your utilization of licenses within your environment and can freely audit for misuse. When you have a Restricted Use License (RUL), you have permission to use the product for a specific business purpose leveraging a certain number of standard and custom objects. Standard objects are modules within the Salesforce platform, such as contacts, accounts, or prospects. A custom object is something that was built by a Salesforce developer specifically for your company. The license limitations in an RUL are a contractual limitation, not a technical one. A contractual limitation means there is legal language on your Order Form specifying how the license may use a predetermined number of standard/custom objects even though there is a set quantity limitation, technically there is no way to shut off access to other custom objects for that user. This license is often in place for a subset of users who only need limited access to your tool. For example, an employee who is only viewing the data and not editing it. If this group starts editing objects, it becomes in and of itself a compliance issue. Salesforce makes it easy for the end-user to accidentally do this without realizing they are in breach of the license. They will use this opportunity to accuse you of using the license incorrectly and request that your organization upgrade these licenses to full users and will seek compensation since the inception of the misuse. Contractually, Salesforce has the right to charge you full retail price for those non-compliant users. Another time when Salesforce audits come into play is when a client is on a SELA Agreement (Salesforce Enterprise License Agreement).

How do you get around Salesforce RUL audit problems?

The best thing you can do is to establish quarterly check-ins with your account team at Salesforce. Use these meetings to stay on the same page with your account team and create a paper trail that shows how your users are engaging with the platform. If you are accused of breaching restricted use, but have established quarterly check-ins with a paper trail, you can respond to Salesforce by saying “We met with your team and they didn’t bring anything up during our meeting so why should we believe you now?” Without quarterly check-ins and a paper trail, you get into a he-said-she-said argument. Often times, the employee in breach of license may have accessed the wrong objects once or twice throughout the life of an account. Salesforce will create an argument that the license has been systematically misused for a long period of time. We treat this event like a litigation. If you don’t have a paper trail of record, then you have no legal foundation for a defense. When comparing the perspective outcome of the party that has records and the other that does not, the person with records almost always wins in court. Keep careful documentation about your interactions with Salesforce, and have open conversations about audit and license use risk. This will build a strong foundation and reduce the risk of an audit.

How to Handle an Audit from SAP

An audit by SAP is very similar to an audit by Oracle in that, historically, their licensing model is primarily “consumption-based.” This means your price is based on your company’s revenue, profit, services used, how many suppliers you have, or any number of a series of variables. This model falls under the concept of Value-Based Pricing and is a subjective assessment of value captured from the utilization of the software. SAP will use many of the same tactics as Oracle which we’ve outlined above. One thing to specifically note about SAP is that they very frequently introduce audits during merger & acquisition (M&A) announcements. When supporting clients with M&A IT Sourcing, we commonly tell our clients to “get ready for the ‘ransom letter.’” These aren’t our words but rather those of our clients who received notifications from suppliers such as SAP immediately after announcing a large acquisition to the market. Want to know if you’re susceptible to these ‘ransom letters?’ Take a look at your contract and keep an eye out for any language within your contract that indicates they will “readdress the terms of the contract if you the customer acquires or divests entities during the term of the contract.” If you have this language within your contract you will more than likely receive a similar notification within 1 month of publicly notifying your M&A intent. In order to defeat an SAP audit, take the same approach we would take with Oracle and then protect yourself moving forward by changing your pricing model to a fixed baseline model that is attached to the reasonably certain variables in your company such as the number of employees.

What to Do When Microsoft Audits You

Microsoft’s audits vary depending on the products and services within your contract. Similar to Salesforce, Microsoft will commonly focus on those licenses that have restricted use. A very common audit for those clients with perpetual Microsoft Office licenses is the 1-to-1 validation of windows desktop licenses to computers within a customer’s environment. Similarly, for those clients with an active Office 365 subscription, Microsoft will look closely at the utilization of subscriptions that are inherently limited in their intended use. This is augmented by a deep analysis of computers and users in your ecosystem to ensure the capabilities being used are properly licensed. If you are paying for any physical or virtualized servers from Microsoft within an SCE agreement, you will commonly be audited to ensure your consumption metrics are within your contracted allocation. Frequently with Microsoft, you are leasing the utilization of servers either on-premise or in the cloud. Generally speaking, if you have a physical piece of hardware from Microsoft on-premise, they will almost certainly conduct an audit at renewal time to monitor utilization as part of their “optimization analysis.” In a nutshell, they will try to move you from an on-premise environment to the cloud. Conceptually this is fine but they will use that audit as leverage to do a lift and shift into Microsoft Azure. Microsoft Azure is a very attractive product for the sales team because they are heavily incentivized to get your company into the cloud. The market is looking at how Microsoft’s cloud growth is going year after year and as a result, the company wants to increase its usage. Essentially, Microsoft will audit to try and sell you on Azure. This isn’t necessarily a bad move to make but knowing key motivators will keep you ahead of the game and alleviate any potentially detrimental surprises.

What Happens Next?

If you’ve been audited by any of your enterprise software providers, we recommend bringing in outside help to guide you through the process. Leveraging their experience and expertise will go a long way to mitigate both short and long term risk that can easily rise into the millions. Don’t solely believe what your account executive is telling you, oftentimes they don’t have all the information needed and they are heavily incentivized by their employers. Your outside expert will be able to comb through your contracts, identify risks/opportunities, and drive both cost savings and containment. With the proper assistance, you’ll be able to confidently stand your ground and mitigate risks before they are realized.

3 Strategies to Elevate Your Software Supplier Relationship

Over the years, our TNG client family has requested more and more guidance related to managing and elevating their commercial supplier relationships. Within this article, you’ll find our top 3 proven strategies to transform IT supplier relationships from tactical to strategic.

Strategy #1 – Control the Flow

When we say “control the flow”, we’re referring to conversation, meeting, and engagement flow.

When prospective clients reach out to TNG, they almost always have the complaint that the supplier knows more about the “needs” of their organization than they do. This most typically is due to the internal lack of time and/or resources to focus on a specific supplier or digital capability. On the other hand, the supplier’s sales team is laser focused on opportunities to grow their business inside of your organization. Immediately, this creates an unfair environment for all parties involved.

You may be thinking that this only creates an unfair advantage for you, the customer. Well, in most situations that’s true. However, it should also be noted that in some circumstances, the supplier’s sales team may be operating with good intentions and simply answering your internal stakeholder’s demand for attention. In short, when one side knows more than the other, it creates an uncomfortable situation for at least one party.

As our team brings 100+ years of collective experience, we have seen just about everything. Most of TNG’s clients are very well-established companies that have $5 billion+ in annual revenue. These companies typically have a “center of excellence (COE)” and/or a “software asset management (SAM)” team. While the overall intent is good, we typically see only about 10% of our clients leveraging these teams of resources correctly.

What happens to the other 90%? Well, one of the most classic inside sales techniques is for a supplier’s sales team member to establish, chair, and/or participate in a COE with a specific focus on their software and its many digital capabilities. This type of group typically meets either monthly or quarterly and is sold as a way in which the sales team member can “inform” the COE/SAM team members of the “demand” coming from inside of the organization. The reality is that the “demand” is often created by the sales team member who has been pushing a land-and-expand strategy inside of the organization.

The easiest way to not only level the playing field with your software suppliers, but also elevate the relationship from tactical to strategic, is to set up strict governance around the overall engagement. Every supplier engagement is slightly unique, but we recommend focusing on the following core tenants:

Focus your efforts on your Top 10 software suppliers.
Develop a steering team of executive IT leaders that are in control of the Digital Capability strategy for your company.
Develop an internal COE for each of your Top 10 suppliers. The size and scope of them should proportionally match the importance of the supplier’s impact on your business.
Identify and assign clear roles & responsibilities for each employee team member that is part of their performance objectives.
Do not allow supplier sales team members to be a member of the core team but rather serve as an invited guest on a routine cadence.

This is about the time where traditional sales team members will indicate that this approach will slow down process, innovation, growth, etc. The reality is quite the opposite when properly set up and managed. The primary outcomes you want to achieve are the following:

Shift the communication paradigm from outside-in to inside-out. This allows the company to ideate, contemplate, and organically socialize a software roadmap (vs. constantly asking the supplier for a list of their asset inventory).
Share information with suppliers only when it has been fully vetted and approved as a sanctioned project or approved proof of concept. If done properly, this drastically decreases the chance of duplicate purchasing, split requirements, and/or random unwarranted proof of concepts (that usually turn into shelfware) around the enterprise.
Allow everyone to be more efficient and structured with their time by eliminating the need for follow-up meetings, etc. In other words, engaging suppliers only after decisions have been made internally by the COE will enable the COE to be treated as a true authoritative entity vs a “check the box” exercise.
Provide opportunities for suppliers to suggest innovative solutions in a fully committed environment.

We find that our TNG clients save an average of 26% annually by deploying this strategy alone (with our help, of course).

Strategy #2 – Manage Upwards

Anyone who knows the basics of selling understands that the easiest way to make a sale is to identify and influence the decision-maker directly. For large enterprise sales teams who are managing multi-million-dollar contracts, that decision-maker is very often an executive leader within the company. Far too often, we find that organizations provide unfettered access to executives without reason. This, in short, usually enables a very unhealthy and complacent comfort for the supplier sales team that (if not properly managed) rarely produces intrinsic value for the company.

By far one of the most effective ways to elevate your supplier relationship is to set up strategic business discussions between company and supplier executives. The key here is to establish equal representation on both sides and ensure there is proper attention and respect established between both companies. Access to your company’s executives should largely be restricted to these meetings which, where possible, should be set up by the COE/SAM teams mentioned in Strategy #1.

Subsequently, it’s important to know that you can leverage access to your executives to exemplify to a new supplier that any new proof of concept, tool, etc. will be given the highest level of attention and visibility. This means a lot for any supplier (new or existing) as it ensures the right eyes are engaged.

Strategy #3 – Set Realistic Milestones that are Mutually Achievable

Just as employees like to understand their performance objectives for each year, it has been proven by TNG that suppliers who understand what “great looks like” outperform those that are not given clear business objectives. Nearly everyone in the business world understands the concept of milestones; however, the implementation of the methodology is highly inconsistent.

One of the many mistakes companies make when establishing a milestone-based contract is they make the actual milestones either ambiguous or unrealistic. Both are equally as dangerous. Ambiguity allows everyone to be right and wrong at the same time. Unrealistic milestones, if accepted by the supplier, often induce unhealthy behaviors by those chartered with meeting or exceeding the same. It doesn’t take much to set a once “strategic” relationship on a path to implosion with either of these scenarios.

Establishing realistic milestones is important for your suppliers. Everyone, at every age, enjoys accomplishing a goal. It’s important to recognize this fact since at the end of the day, as this is a human reaction, and well, we’re all human.

To learn how to properly set up a milestone plan and/or implement any other strategies mentioned above that drive performance for both the company and the supplier, here’s a hint: It’s not just the supplier that has performance milestones!