Proof Beats Promises —See How We Saved Millions

​When should planning for a merger or acquisition begin? If your answer is Day 1 - the first day after you close the deal - you’re wrong and you’re behind by at least 6-12 months.​​​Planning & executing a marriage like this is not something that should be done alone nor should you wait till the contracts are signed to begin the process.

​In this article, I’m going to teach you everything you need to know about the appropriate steps  IT Sourcing should take before, during, and after the M&A transaction. We are going to discuss best-in-class planning and execution techniques for IT Sourcing during both 1) merger and 2) acquisition initiatives. Foundationally, people will use the same tactical steps for either a merger or acquisition so all the information you find here will apply generally to both.

There are many reasons you should not do this alone:

You need outside help to get the job done successfully.

Every company that we have ever met, or heard about, that has tried to successfully identify and execute on synergy initiatives purely with their own internal resources has completely failed. This failure can come in the form of missing  transaction deadlines, cost savings opportunities, or losing key talent due to burnout, just to name a few. In fact, companies that primarily utilize internal resources generally extend the timeline for any synergy recognition by 2-3 years.

This is for multiple reasons ranging from workload overallocation, employee burnout, to employee turnover. We could write an entirely separate article just on the emotional impacts your employees will feel after M&A activities are announced. These emotions are also unique to which side of the acquisition their jobs are located (buyer vs. seller).

If you think about the rationale behind any M&A transaction it really boils down to a desire for higher revenues and lower costs. To ensure your company is able to recognize the benefits of this transaction as quickly as possible, you’re going to need help.

Resource Constraints

This is a full-time job. Managing activities around identifying Day 1 requirements (activities to keep the business operating) and Value Capture Initiatives (activities that are intended to reduce demand, labor, or cost) requires a huge time investment.

Asking your existing resources to oversee these activities in addition to their other responsibilities is unrealistic. It is the equivalent of giving two full-time jobs to one person. Things will naturally slip through the cracks and this is entirely avoidable.

Market Intelligence is another resource constraint that is important to mention. There are market intelligence research firms out there, like Gartner, McKinsey, and Forrester, to name a few, who provide a wide-angle view of market data. Their data is a great starting point for many organizations but it won’t help you get to the finish line without advisors and execution partners.

Value Capture Initiatives

We recommend isolating cost savings initiatives into a minimum of 3 categories. The following three titles are widely used within the industry:

• Quick Wins
• Strategic Sourcing Events
• Business Transformation

Naturally, when we identify Quick Win opportunities we are indicating that the time (and corresponding effort) to value is relatively short. On the other side of the spectrum, when we identify a Business Transformation initiative we recognize a large opportunity exists but it will take significant time/effort to realize.

Every M&A transaction will present different opportunities and challenges. You will be pulled in so many different directions that at times it will feel as if you’re getting nothing done at all. At those moments, it’s important to recognize the planning and analysis efforts that have taken place to make this opportunity come to life.

Speaking from experience, we strongly advise you to “keep things simple” when it comes to identifying, classifying, and tracking your Value Capture Initiatives. The more complexity you add the less time you’ll have achieving synergies that make a material impact for your company.

Quick Wins

Finding efficient, simple ways to reduce IT spend is paramount for any company… especially one which is embarking on an M&A transaction. The easiest and quickest solutions come from simply taking an inventory of each company’s supply base and contracts.

Combining company spend can create natural opportunities to renegotiate agreements - especially in the IT sector. By analyzing contracts to identify areas of overlap and redundancy, you can find multiple cost-saving opportunities including volume discounts and supplier/contract consolidation.

Strategic Sourcing Events

Strategic Sourcing Events are what most people think of when they conceptualize how IT will identify and realize cost savings as a result of combining company spend. Naturally, these initiatives require more effort than Quick Win opportunities of which may not be readily apparent prior to Day 1.

These initiatives will focus on rationalizing the supply base, rates, and services. A smart approach will be to break out these initiatives via a digital capability taxonomy that matches how your organization categorizes IT services to its internal and/or external users. This will proactively align your cost savings initiatives to your internal business units and company objectives.  

Sourcing events will most often include the typical procurement steps of conducting RFPs (Requests for Proposal) and negotiating with suppliers to rebid contracts. This step can take anywhere from 3-24 months depending on the size, scale, and complexity of your transactions.

Business Transformation

This last one is the most complex. It involves changing the way the business functions - whether a process change or a platform change or some other foundational alteration. These opportunities take the longest, clocking in around 1 to 3 years to complete.

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Identifying corporate synergy initiatives is a complex endeavor. You need a team of both internal and external experts dedicated to driving value capture for the NewCo (newly combined company). If your transaction is relatively small, this team can be as simple as one person… the point being there always needs to be someone dedicated to this effort.

Only outside expertise will be able to truly advise you on target market rates, supplier options, service levels, etc. You only know the rates and the companies you’ve worked with - you don’t know what other businesses are paying for the same products, not to mention any new suppliers coming your way through the M&A.

Bringing in outside help is critical to ensuring you are well-positioned to identify, analyze, and execute cost synergies on, and before, Day 1.

Legal Reasons

It's an SEC violation if you act on behalf of another publicly-traded company before you actually own them. This could be viewed as collusion within the marketplace.

To refrain from any violations, it’s advisable for companies to leverage external, independent advisors to ensure the information on the newly combined company is used appropriately and only for value capture initiatives.

You want to bring someone in who can help you do the appropriate analysis so that there’s a distance between your company, your employees, and the company you’re merging with or acquiring.

Process Standardization

No matter whether you are a 100-person company or 100,000, you’ll quickly discover the importance of having standard procedures within any M&A transaction. Program management information needs to be collected, analyzed, and presented in a consistent manner to eliminate ambiguity for senior executives.

Standing up a PMO (Program Management Office) who can standardize the analysis and the presentation of information can, and will, greatly reduce chaos.

You need to start the planning process immediately.

In an ideal world, the minimum amount of time you really need to get this right, for a large transaction of $1 billion or more, is six months prior to close to complete the planning process.

Ideally, you will stand up your Enterprise Integration Management Office (EIMO) once you enter the final due diligence process with your target company. Again, the earlier you can get this planning started, the quicker you’ll be able to realize those profits.

An EIMO is a separate individual business unit and is accountable for all the integration activities including both the identification of synergies as well as Day 1 activities.

The knowledge transfer process from your due diligence team to your EIMO and Integration Management Teams (IMT) will prove to be invaluable.

Experience has taught us that no matter how prepared you think you are, there will always be hiccups along the way. The longer runway you have prior to Day 1, the greater the probability your company will start saving money on, or before, Day 1 rather than in year 2 or 3.

In order to prevent both roadblocks and bottlenecks, you need to empower your people with clear and distinct decision-making authority immediately.

Most organizations fall behind in their execution plans based on a lack of clear decision-making authority when acting on behalf of the newly combined company.

This naturally drives all decisions to the EIMO which turns into a bottleneck for the organization.

We recommend setting clear guiding principles and tactical direction (via examples) early within the planning phase to ensure your key stakeholders are aligned and empowered to act as catalysts for the EIMO. While each organization’s decision-making authority and autonomy is unique to their culture, what remains consistent is the speed in which decisions will need to be made before, during, and after the transaction.

In short, the more authority you can safely push downwards inside of your organization, the better.

The change management process is critical.

Clear communication guidelines need to be created in coordination with your legal team and need to take into consideration internal, external, and regulatory impacts.

Internally, you’ll have employees concerned about their existing roles within the company and how the transaction will affect their lives.

Externally, you’ll need to manage expectations with suppliers of both companies.

Immediately upon announcing any M&A transaction, the phone will start ringing for both organizations. Suppliers will be trying to take advantage of the change to gain more business and/or to increase rates.

Be prepared to immediately publish a message to all your suppliers after an announcement. Doing so will help to avoid a tidal wave of requests within your planning phase. At a minimum, publish a blanket statement on your external facing website for suppliers to read in a self-service manner.

Clear and proactive communication both internally and externally will allow your organization to be ahead of the Q&A frenzy.

Two Key Phases of an M&A Transaction

Planning: Generally, this encompasses all activities between the transaction announcement and Day 1 (first day of the NewCo).

Execution: Generally, this encompasses all activities that take place to realize the operational synergies identified within the planning phase. Most commonly, these activities are post Day 1, however, we will discuss opportunities to start in the planning phase.

It’s critically important to start planning immediately after (or even before) the announcement of the transaction. If you fail to start pre-Day 1, it’s important to understand that you will have already lost a significant amount of potential value capture from the NewCo. As with any cost savings project, you need to prepare as far in advance as possible to ensure your execution teams are well prepared and aligned.

An Opportunity Tracker for Tracking/Reporting in Both Phases

Within both phases, it is extremely important you develop and actively manage an Opportunity Tracker in the interest of identifying 1) initiatives that are business-critical for continuity purposes and 2) those which will identify cost savings for the new company.

Tracking these initiatives in an easy to understand and consistent manner will provide several intrinsic values for your organization and its many stakeholders. Most importantly, it will serve as a single source of truth for reporting and execution purposes.

Your Opportunity Tracker needs to capture two primary areas of work: Operational Requirements for Day 1 and Value Capture Opportunities that contemplate action before, on, or after Day 1.

Example of a Day 1 Operational Requirement:
What happens to the acquired company’s email server after Day 1?

Do the companies merge their email platforms or do they keep them completely separate?

Who will be accountable for the transition plan?

While this action may not be a value capture initiative, keeping email working for the NewCo is arguably critical to business continuity. This is an example of an operational requirement.

Example of a Value Capture Opportunity:
A value capture opportunity is essentially a cost savings synergy that originates from the harmonization of suppliers, contracts, etc.

Expanding upon our email Day 1 requirement above, if your organization makes a decision that the NewCo will migrate to a single email platform (most common), this would create a value capture opportunity based on a contract/rate negotiation event with a new or existing supplier.

Examples of initiatives may include a renegotiation with Microsoft or a sourcing event to identify a new service provider. The objective is that you need to quickly and easily be able to isolate those line items that are Day 1 Requirements vs. Value Capture Opportunities. Within the Opportunity Tracker, each line item will include details about the Cost to Achieve, ROI, resources needed to achieve the goal, etc.

Download my Opportunity Tracker template to see how this information can be laid out.

We also go over the Opportunity Tracker in detail later in this article.

Organizational Design

Whether your business makes $1 million a year or $1 billion, every company needs to create an EIMO (previously explained under “You Need to Start the Planning Process Immediately”) that acts as its own specific business unit. The process is the same, although the size and scope may change.

If you’re going through an acquisition, the acquiring company is responsible for creating the EIMO business unit that reports directly to the CEO. If you’re merging, the company that will be retaining the CEO will be responsible for the EIMO.

Basically, the EIMO business unit needs to be attached to the leadership team of the new company.

Requirements of the EIMO

This unit needs to have its own budget. You know that in business, you’re going to have to spend money to make money and this temporary department is no different.

Most companies spend 5% of the new company’s value on M&A services in order to save 40% after the transaction is complete.

In addition to their own budget, your EIMO needs its own targets.

Although it’s not technically making money, it will be saving your company significant sums if organized properly.

​Control Tower

Underneath the EIMO, you’ll have a Control Tower.

The Control Tower ensures that all of the information that’s coming from the IMTs (and the Functional Teams below them) are being harmonized in a consistent and actionable way. If all of the information is well organized, you’ll be able to make smarter business decisions.

Integration Management Teams & Leads

To properly succeed, you need a dedicated Integration Management Team whose full-time job is to identify synergy opportunities and Day 1 requirements.

This team will have a leader who is accountable for all the activities of the team. Reporting to the leader will be individual owners of specific initiatives or capabilities.

For example, in an IT IMT you’ll have one lead who is responsible for all the activities of the team and the rest of the team will be made up of one person per category of spend. Maybe one person in charge of infrastructure or hardware, another in charge of software, and another in charge of services, etc.

Basically, one person on the team per vertical of how the business operates. These individuals are accountable for identifying Day 1 operational requirements and value capture opportunities for the NewCo.

Functional Teams

While your IMTs are focusing on Day 1 operational requirements, it’s important for your IT Sourcing/Procurement team to work alongside these same teams in the interest of identifying value capture opportunities.

In realistic terms purely based on how large organizations operate, it’s important to recognize that the IMTs will often be more focused on Day 1 operational requirements while your IT Sourcing/Procurement team will be primarily focused on value capture opportunities. This is completely acceptable as long as there is continuous alignment.

Planning Phase

Step 1: Clean Room

During the very beginning of the Planning Phase, you need to set up - either virtually or physically - a Clean Room.

A Clean Room is essentially a quarantined environment where you store and analyze information about the new company you're either acquiring or merging. This information is only available to a handful of individuals within the IT IMT and Functional Teams, and they will be responsible for analyzing data, contracts, etc. in the interest of identifying both Day 1 operational requirements and value capture initiatives.

The room itself can be virtual in nature such as a secure SharePoint or Google Drive. The bifurcation of information from the rest of the organization is important to minimize public perception, as well as operational and regulatory risk. Make sure each individual that has access to this virtual or physical Clean Room signs a separate Confidentiality Agreement to ensure information is not shared with others prior to close.

Obviously, your legal team will be the ultimate determining factor for who should have access and when information can be shared more broadly as each transaction is different.

Most of your value capture initiatives will originate from the Clean Room as these individuals will be able to compare suppliers, contracts, rates, etc. and place them on the Opportunity Tracker.

Step 2: Gather Data

Both companies will upload data and information into the Clean Room.

The company being acquired (or losing CEO status during the merger) needs to upload their data according to the same taxonomy of how the new leading company categorizes their spend.

This is subtle but a very important nuance.

You, the acquiring company, want their data to match up with your spend categories as much as possible so that you can create an accurate analysis.

For example, your spend taxonomy splits categories out by hardware, software, services, mobile telecom infrastructure, etc.

When you acquire data from the other company, map their spend according to your own taxonomy so that you can have a one-to-one relationship between your current contracts and their contracts that will eventually have to become one unified contract. You want to compare apples to apples, not oranges.

Step 3: Analyze

When you have the Clean Room filled up with the data from both your company and the other company, you’ll be able to start analyzing the opportunities available.

This will give you your first look into:

• Combined company spend per category
• Supplier overlap, if any
• Current state rates per supplier/digital capability

With this information, you can start identifying initiatives within your Opportunity Tracker.

If each company has a Microsoft contract, for example, you can start looking at the costs in each of your contracts - who has better rates and how you can negotiate those further with a larger volume, etc.? This is considered a Quick Win opportunity.

If there is no supplier overlap in the same category of spend, then you don’t have a Quick Win opportunity but instead a Sourcing Opportunity. In this case, you can go to market with your new combined spend and do an RFP to move everyone to the same supplier under one contract instead of multiple.

​Keep An Eye Out for Contract Risk

​As I’ve mentioned before in other posts on IT Software negotiation, it is very common for major software providers to intentionally insert M&A language in their master service agreements and/or order forms that are very ambiguous and open-ended. What remains consistent is that, by default, this inserted language will always be in favor of the software company. Subsequently, they know their primary contacts within the client organization rarely review such language as it’s not top of mind at that point in time.

We find that 2 out of 3 clients entering into an M&A transaction don’t even think to look for contract risk within their existing contracts. Subsequently, we find this same statistic holds true for the number of times we identify risk in those contracts we review on behalf of the client.

One very common example of contractual risk we identify for clients is value-based pricing mechanisms. Specifically, large software companies will include language that indicates “the parties will readdress pricing based on increased customer value extracted from the platform.” We call this commercial risk as it essentially creates an open playing field for renegotiation. Some of our clients actually call this “ransom language” based on software companies being well aware of the cost of change to move off the platform during a very sensitive time. In other words, these suppliers will charge a “ransom” that is just under that of the cost of change baseline, just because they can.

While it may be fair to say the NewCo will achieve greater value from the platform, it’s important to proactively identify and mitigate (to the extent possible) any potential risks (such as commercial risk) to ensure you minimize and value capture slippage.

Other very common questions you should ask yourself during your contract risk assessment include the following:

• Are you allowed to terminate for convenience?
• Are you allowed to use your existing contract with a new subsidiary and/or wholly owned entity?
• Are you able to renegotiate the contract now to avoid any surprises after Day 1 and/or the natural expiration of your current contract?

When you’re doing this assessment, prioritize your time and energy around your largest spend contracts first. Look at your top 20 supplier contracts in terms of spend - no more than that - before you look at all the others.

You don’t have to comb through each of these contracts by hand either. There are software products out there that will do an Optical Character Recognition (OCR) scan for you and isolate contracts that have keyword risk.

Levels of Contract Risk Remediation:

Level 1 - OCR

Once you stand up your Clean Room with your various contracts and documents, you essentially want to run them through some sort of search tool to identify if they have any key topics that might trigger a negotiation event as a result of the transaction.

A few examples of OCR companies include Kronos OCR, Seal OCR, KIR OCR, Vanguard OCR, and a few others can be found here. We have no affiliation with any of these products, we merely want to provide information you may find useful.

Common causes for renegotiation include:

Assignment - Does the contract allow you assign it to another company? You’re buying the company but not all contracts can be assigned during an M&A.

Change of Control - This concept is similar to assignments. Basically, does the contract include continued control language that would allow for a new company to take over said contract?

Governing Law & Dispute Resolution - What state, county, or jurisdiction does this contract live in? Some suppliers don’t want to work in specific jurisdictions because of legal restrictions or political friction.

Limitation of Liability - Your legal team will have language surrounding what kinds of liability guidelines they’re willing to accept, especially with suppliers. During an M&A, you’re acquiring so many new suppliers it’s easy to lose sight of this potential risk, particularly within the R&D field. As contracts naturally expire, you’ll want to align the new suppliers to your standard contract language to minimize risk.

Renewal - Are your contracts set to automatically renew? Are they evergreen?

Restricted Covenants - This language essentially outlines that, in order to receive your pricing today, you basically have to spend a certain amount (or meet certain thresholds) per contract cycle/year. These contracts include Minimum Spend Levels.

Termination - Do the contracts include Termination for Convenience? If they don’t, you need to know the terms of termination and weigh that as a “cost to achieve” within any initiative within the Opportunity Tracker.

These are some of the most common reasons for renegotiation with suppliers. While it’s possible to have human eyes scan contracts for this language, it’s much less expensive to have a software churn this out for you with the intent and understanding that this process will only highlight 75% (at best) of your basic risks.

We always recommend you supplement strategic supplier contract risk assessments (typically your top 10 suppliers by spend) with a Level 2 assessment.

Level 2 – Human Eyes Looking for IT Risks

Level 2 contract risk evaluation is necessary to identify specific and material risks that may adversely impact your company. From a tactical perspective, this requires human review with a specific focus on high impact risks to your organization.

The following risks are typically identified in Level 2 evaluations:

Volume Based Pricing (Data Pulls) - No matter the size of the M&A transaction, you’ll almost always have two different suppliers providing the same or similar service. If you aren’t able to consolidate to one supplier right away, and require data to be pulled/integrated from multiple systems, you have the potential to see volume-based contracts skyrocket for 6-12 months as a result of both companies using both services.  

It’s important to remember that volume-based contracts come in all shapes and sizes ranging from raw data consumption to API calls. It’s important to conduct an assessment of your Day 1, 30, and 100 requirements to ensure, at the very least, your most strategic supplier relationships (aka highest cost contracts) are analyzed to proactively identify this situation. Identifying these additional costs on, or around, Day 1 will inform your business case on how quickly you merge systems, processes, etc.

In situations where two companies need to run concurrent systems for quite some time for operational and/or regulatory reasons, it’s very common for this to create a “negative synergy.” In other words, this will be an added expense to the NewCo that will degrade the potential synergy cost savings generated from the transaction.

You need to identify systems/processes that will run concurrently as early as possible within the Planning Phase. The supplier contracts that are governing these systems/processes will need to be analyzed immediately to quickly identify the potential financial impact to the NewCo. Naturally, if you identify a situation that causes you to spend an extra $1 million+ during the transition period, you’ll be more inclined to get it streamlined earlier rather than later.

Pricing Mechanisms tied to moving targets (R&D department spend, annual revenue, etc.) - Almost all software suppliers sell with a “value-based pricing” mindset but only some of these suppliers charge a customer tactically in this manner. Within large organizations, we often find this within supplier contracts supporting the R&D department.

Some software suppliers charge by value obtained while others benchmark the perceived value extracted by utilizing your annual revenue, and/or R&D spend, as a cost metric.  

This can be a slippery slope because, for most businesses with an R&D department, your annual spend is going to double. Without the proper protections in place, this potentially equates to your existing contract cost doubling as well.  

While contractually this is something they may be allowed to pursue, most strategic suppliers will accept an M&A transaction as a renegotiation event IF you catch this potential risk early.  

Yes, we intentionally underlined “IF” within the last sentence. It’s important that you renegotiate these contracts as early as possible before your cost and leverage spin out of control. If properly managed, most savvy software suppliers will accept a decrease in their potential future revenue if they feel comfortable that they will secure a strategic position within the NewCo’s supply base. Again, this needs to be very carefully managed.

License Restrictions - Are there country-specific license agreements? Or are they global in nature?

For example, if a software contract only allows you to use their platform in a specific country, but the NewCo will require employees to access that same platform globally, you could be hit with massive fines for license infringement.

Notice Obligation - Does a contract require explicit notice prior to an acquisition or merger taking place in order to be transferred to the NewCo?

If notice is required, and you don’t provide the same during your Planning Phase, you could find yourself in breach of contract and face heavy fines, a potential lawsuit, or termination of service.

The NewCo Spend Baseline & Supplier List

Just like building a new house, it’s important you build a strong foundation. Your foundation for the NewCo starts with a combined spend baseline and supplier list.

Tactically speaking, this can be achieved through spend visibility tools or by just using a simple Excel Spreadsheet. From a baseline perspective, you will want to create a master list of all your suppliers, which organization they are currently supporting, and the annual spend of each split out by organization (if the supplier is servicing both companies). Data permitting, we also suggest you identify “how” each supplier is supporting each organization by assigning a spend category and/or a digital capability taxonomy code. If you have this level of detail, it will prove to drive efficiencies for downstream analysis activities.

Create your spend/supplier baseline as soon as possible during the Planning Phase. Subsequently, you’ll want to create this baseline before you start identifying any cost savings initiatives no matter how much your organization is pushing for the same. We have seen countless hours wasted when clients, and/or partners, start identifying opportunities before they have built and aligned on, a foundational baseline.

While this may feel like a  tactical step, it is extremely important as it creates the foundation for future steps you’ll take.

From this foundational list, you’ll be able to quickly identify, analyze, and execute the following Quick Wins:

• Identify duplicate suppliers providing the same service to both organizations; and,  
• Identify overlapping services across multiple suppliers.

IT Sourcing Initiatives Identification

This next step needs to be done in a very coordinated and organized way. For simplicity purposes, we suggest creating a separate Excel Spreadsheet that is purely dedicated to identifying synergy opportunities.

We strongly advise this be a standalone document for quality assurance, data backup, and access control reasons. Within this document, hereby referred to as the “Opportunity Tracker,”  you will be proactively identifying your value capture initiatives, stakeholders, synergy targets, etc.

The Opportunity Tracker will serve multiple downstream purposes but most importantly will serve as a single point of truth for synergy planning and execution. It will help you identify prospective value capture (financial opportunity) and the time and resources it will take to achieve them.

The overall guiding principle is that this Opportunity Tracker is going to keep your initiatives straight from a Project Management standpoint and it’s going to help you prioritize what to work on first.

Your Opportunity Tracker should classify opportunities based on:

Initiative Grouping - This is usually based on supplier and/or digital capability. The main priority here is to roll multiple actions with one supplier into a single initiative.

Category of Spend - Categories of spend may include IT Software, Hardware, Mobile Telecom, etc.

Type of Opportunity - There are 3 different types of opportunities (referenced above under “Value Capture Initiatives”): Quick Wins, Strategic Sourcing Events, and Business Transformation.

• Quick Wins are those initiatives that can be done quickly and with very little effort.

• Strategic Sourcing Events are initiatives that require a sourcing professional to source the marketplace to capture the most value for your NewCo. Most commonly, this will include activities such as supplier rationalization.

• Business Transformation initiatives fundamentally change the way you do business. These generally take the longest amount of time, effort, and budget but will return the greatest amount of value to the NewCo. Most commonly, these initiatives will include process changes, etc.

Supplier Impacted - It’s very important to identify which supplier(s) will be impacted by each initiative. You want to be sure to break this out by organization so you can quickly identify the location of the impact.

Stakeholders - In this cell, you need to identify key stakeholders that need to stay aligned and supportive of the initiative. The identification of key stakeholders is very important not only for project tracking purposes but also for tracking change management efforts. Specifically, you’ll want to ensure stakeholders are aligned to the “why” statement of any change so they can proactively act as change catalysts. Other downstream ways to use this data will be to ensure cross-pollination of ideas, identify and proactively prevent burnout, and to enable delegation.

Frequency of Savings - Will tackling this initiative give your company recurring savings or is the value capture a one-time occurrence?

Type of Synergy - There are basically 8 different types of synergy that I’ll go over briefly here:

• Wedding Present - When a supplier gives you cost savings or a concession in the interest of goodwill. They want to be in your good graces during and after the M&A.

• Demand Optimization - When you are lowering demand to use a specific supplier or to use a specific service. Your costs go down because you have fewer licenses, etc.

• Supplier Rationalization - We touched on this briefly in the Strategic Sourcing Events section above. Depending on niche offerings, digital capabilities, rates, etc, you need to deliberately create a supplier strategy that drives the greatest value for your NewCo. This may, or may not, include eliminating duplicate suppliers, etc.

• Process and Specification Rationalization - Takes place when you’re eliminating duplicate processes, etc.

• Payment Term Optimization - This primarily focuses on improving cash flow terms for your NewCo by extending payment terms, net discount rates, etc. This is a very important, but tactical, synergy opportunity that collectively could make a significant net positive impact for the New Co.

• Price Alignment - Quite simply, the process of leveraging an existing contract that secures the best rates with a single supplier.

• Supplier Relationship Management - This is often harder to quantify from a value capture standpoint but often a critical component to strategic suppliers for the NewCo. Identifying an initiative with this classification is a deliberate identification that a supplier relationship needs to be uplifted in order to extract the greatest amount of potential value.

• Volume Consolidation - Last, but certainly not least, this classification focuses on consolidating the volume of spend with suppliers to drive better rates and commercial terms for the NewCo.

Confidence to Achieve - While completely subjective, determining whether you have high, medium, or low confidence in achieving this initiative is still an important consideration for tracking and prioritization purposes.  

Time - Identifying the amount of time an initiative will take in order to start achieving the synergy. This is one of several critical variables within the Opportunity Tracker to ensure synergy financial planning and resource allocation alignment. We recommend quantifying this in terms of months.

Resource Requirements - In this section, you outline what resources are required to successfully execute the initiative. This includes both internal and external resources.

Internally, which of your staff will be attached to the execution of this project?

Externally, will you need advisors? Sourcing support? Legal, financial, or PM support? This can come in the form of advisory support to identify “should cost” benchmark rates, management consulting, or sourcing professionals who know how to run sourcing events (ex: RFPs).

You’ll want to establish a baseline cost for each role in order to calculate a “Cost to Achieve” over time. The Cost to Achieve is your gross costs that will be incurred during the Planning and Execution of a specific initiative. In other words, these are negative costs against any specific synergy estimates for a specific initiative. Naturally, you will want to identify and execute those initiatives that have the lowest Cost to Achieve with the greatest synergy potential.

Synergy Estimate - In this cell, you’ll identify the financial value capture target you have identified (by year) for the NewCo. In a perfect world, this should be calculated as the net synergy which contemplates the gross savings potential against your gross Cost to Achieve. In doing so, you’ll be able to better prioritize resources to those initiatives with the greatest potential upside.

One important thing to note about these synergies - each initiative can have more than one synergy opportunity attached to it!

Execution Phase

In order to successfully execute your plan, we recommend focusing on a few foundational concepts that we have found (through client feedback) organically drives downstream efficiency. In the interest of brevity, we have included a basic outline of these best practices below.

Establish Guiding Principles to Prioritize Projects

The first thing you want to do is establish guiding principles around how individual projects will be resourced based on complexity and value capture potential.

It’s critical to align with your internal finance team on a cost-to-achieve metric that is consistent across the organization. You need to have a clear run rate value identified for the several different internal resources types that will be supporting the execution of your projects. At a bare minimum, you need to identify a blended hourly internal resource cost that is all-encompassing.

To drive process efficiency, you may be more inclined to push decision-making authority farther down into the organization and enable project teams to make decisions based on value vs. cost.  

‍This will decrease time to value on your synergy initiatives. It eliminates the need to request resources or approval to hire from the EIMO which would otherwise bottleneck progress.

We recommend allowing Project Teams to make unilateral resourcing decisions if the cost to achieve is 30% or less than the expected value from the project.

For example, if you project to save $100K by completing this initiative, then it’s acceptable for the Project Team to spend $30K to achieve the savings without a need for individual requests for approval.

Internal Alignment is Critical

The most important thing to keep in mind during the M&A Execution Phase is ensuring continuous alignment between Functional Teams, IMTs, and the EIMO.

In order to keep alignment between the teams, you need to leverage the Opportunity Tracker as the single point of truth for all initiatives and their respective synergy targets. The Opportunity Tracker should be accessible by all relevant stakeholders that are looking to consume information about synergy targets, project status, etc. The more you enable a self-service environment the less you’ll need to respond to data requests, etc.

Subsequently, we recommend establishing weekly check-ins with both Project Execution and Leadership Teams to ensure continuous alignment. During these meetings you should also raise any material issues, risks, and/or achievements for immediate recognition and triaging.

With all of this being said, it’s important that you are cognizant of not placing too many meetings on the calendar that may be close to the same purpose. This problem already exists in almost every corporate culture during the normal course of business so please recognize that this problem will exacerbate itself in an M&A environment.

This graphic represents how we believe weekly project alignment should occur:

This weekly cadence encourages Project Teams to make substantial forward progress before Friday of each week. In other words, this naturally incentivizes those with a personal drive for success to share actions taken/planned each week.

The Opportunity Tracker (as the single source of truth) will enable Leadership teams to monitor this progress in both a self-serve and meeting environment so they can be prepared to ask and answer questions. As we hope you can now see, the Opportunity Tracker will be the discussion platform of choice during both Planning and Execution Phases as it will be managed and presented on a weekly basis in a multitude of forums.

Don’t forget to include the Finance Department in these weekly updates. By doing so, you’ll eliminate any surprises down the road from a synergy tracking standpoint while also ensuring proper expectations are managed at the C-Suite level.

Build a Control Tower

Leverage a Control Tower framework to ensure information is reported in a clean and consistent manner.

This is especially important when reporting information to the EIMO who is then reporting information to the C-Suite.

The Control Tower should report on the following topics:

Resource Allocation Monitoring - How many resources are being used? Are you overtaxed or undertaxed in certain areas of the organization?

Value Capture Initiative Status - How many projects do you have underway and planned? What does your pipeline look like?

Synergy Target Update vs Actuals - This is an update of the financial synergy targets for planned projects, and the actuals for projects that are underway.

Significant Risks/Issues - These can’t always be predicted ahead of time and should be communicated as they arise.

Each of these topics need to be addressed with each IMT. This information should then be harmonized, prioritized, and presented in a consistent manner to the C-Suite.

Establishing clear lines of communication, decision-making capabilities, and tracking systems combined with weekly alignment meetings will help ensure a smooth and efficient Execution Phase.

Imagine you are a C-Suite executive and your business is built on a franchise model. Each franchise branch is owned and managed by a different person but they all use the same ERP and the big corporate umbrella entity that you own pays for all the services.

​Gartner, at its core, is a market intelligence firm. It uses a wide-angle lens to give you a big-picture view of market and industry trends. You can use their data as general negotiation guidance and add their toolkits to your own.​There is absolutely value in this broad-stroke model but it can be limiting when it comes to looking for data and resources that more specifically mirror the size and needs of your organization.

​In this article, I want to outline the similarities and differences between a simple market intelligence firm approach and a niche service provider approach. There are many reasons you might want to research best practices from a 30,000-foot view as well as dive deeper at a 5,000-foot view. Many of my clients will use both Gartner’s and The Negotiator Guru’s (TNG) services to achieve the best results for their companies. The graphic below gives a basic overview of the similarities and differences between our companies and we’ll break each one down in this article.

​There Are Some Similarities Between Gartner & The Negotiator Guru

​Both Gartner and TNG provide information on market and industry trends as well as general guidance on IT Cost Optimization. We have each developed our own toolkits to strategically approach each client’s needs. We overlap when it comes to providing general guidance to CIO’s. Our companies also both provide rate benchmark data although, as you’ll read below, we go about this in different ways. Gartner has quite a bit of data they provide in aggregated terms which is useful but, without isolating the information by industry or annual spend or similar categories, it can be difficult for CIOs and their supporting functions to narrow down actionable intelligence that is defensible and realistic.​

​​There Are Many Differences Between Gartner & The Negotiator Guru

​The keyword I would use to describe the services Gartner and TNG have in common is ‘general.’ Gartner is a great resource for general information across a wide array of topics but rarely provides niche depth that our customers are longing to consume. In contrast, TNG has a deep and disciplined focus within the IT Software vertical which enables our team to share actionable insights that are localized, specific, and highly relevant to our clients. In fact, it was our early clients that helped shaped this disciplined focus as they made their niche needs clearly known to our team. Due to our outstanding client family, TNG has been on a journey to fill our clients’ market intelligence needs for specific supplier relationships. This has organically driven our firm to be the worldwide leader in Salesforce Contract Negotiation Advisory Services which typically is 80% of our work portfolio at any given time. With the average cost of a Gartner subscription being $30,000 per seat, plus additional consulting costs in order to receive personalized advisory services, it’s worth your while to be informed on what they can and cannot help you achieve. Because we provide specialized data and consulting services, we’re able to dig deeper into our clients’ businesses and tailor our process to better achieve the results they’re looking for. The following are a few of the specific areas The Negotiator Guru differs from Gartner in terms of what services and results we can offer our clients.

Right Size

​While Gartner has a wealth of industry data and information, it can be nearly impossible for a client to look at the data and isolate a specific instance to best compare themselves to their peers. This leaves clients feeling informed but uncomfortable about how this information is applicable, and more importantly defensible, within their environment. In certain circumstances, Gartner will provide “best in class” rates for a specific digital capability or service portfolio. One would argue that this provides directionally correct price targets to use as a market intelligence within their supplier negotiation. We generally agree, however, it’s important to note that your software sales executive (or worse yet your internal colleagues) will very quickly share with you that you don’t fit the profile of those rates for XYZ reason. We know this because we’ve been in these conversations on countless occasions. In the rare case that you obtain “best in class” rate information for your specific topic of interest, you are still missing a critical piece of knowledge which we call our “Right Size” guidance. Using conservative figures, there is a 15-20% value-capture opportunity just by applying Right Size practices to your research and internal analysis before entering into any IT contract negotiation Our supplier-specific expertise is one of the biggest contributors to this Right Sizing approach. Within our Discovery Phase, we take an inventory of your current products and licenses and match them against your actual business needs. Almost always, we find that our clients are over licensed and have shelfware within their environment. This is an example of Right Sizing. From a Right Pricing standpoint, not only do we understand “best in class” rates, we localize price targets based on industry, client size, and contract value. This enables our clients to feel 100% confident about the market intelligence as we’re benchmarking their rates against that of their like size industry peers. To expand upon this difference, we’ll use our expertise in Salesforce as an example. As raised and validated by leading consulting and intelligence firms, TNG has the most comprehensive  database of Salesforce rates in the world. This capability allows our team to quickly and easily perform a price benchmarking exercise for our clients. In many instances, we’ll inform prospective clients that their rates are within an acceptable margin of their “Right Price” benchmark and that the only real opportunity (if any) is to pursue “Right Sizing” inside of their environment. At TNG, our culture and client centric values direct our work and guide us to only accept prospective clients where we know with certainty there is a strong potential to drive huge impact.

​Being able to combine Right Price and Right Size analysis will have a significant impact on the effectiveness of your supplier negotiation strategies. ​

Contract Language Risks

​As a result of our deep supplier-specific expertise, our team on average analyzes 5 - 15 software contracts per day. As a result, we know what’s “normal” with all of the large enterprise software platforms and any common risks that are inserted unbeknownst to our clients. By doing this every single day, our team is easily able to identify commonly-used, ambiguous language that always favors the supplier. Large software companies know their customers rarely spend time analyzing terms and conditions within their contracts. Furthermore, the widely accepted principle of Software-as-a-Service (SaaS) leads clients to believe the terms are standard and unchangeable. Unfortunately, this simply isn’t true. As part of our Contract Execution Phase, we conduct a deep dive assessment of our client’s supplier contract as part of our standard service (another major difference from Gartner). To put the impact of this added service into context, our team identifies a unique contractual risk within SaaS contracts alone 33% of the time. If the contract we are analyzing is not a SaaS contract, contractual risks are identified, on average, 85% of the time. Knowing what to look for in each supplier’s contract language helps our clients avoid common pitfalls and supplier-centric renegotiation strategies.

Sales Playbook Coaching

​Another key difference between taking a general approach on market intelligence (Gartner) vs. a software specific deep niche (TNG) is the ability to learn and leverage the sales playbook(s) for these large enterprise suppliers. It may not surprise you that within the most successful software sales organizations are repeatable and prescriptive sales playbooks that guide the near robotic actions of their sales representatives. As a result of learning these sales playbooks we are literally able to tell our clients the moves their suppliers are going to take next. This intelligence allows us to be one step ahead within the negotiation process while leveraging the interests of both parties. While the art of negotiation is an art and not a science, arming yourself with this intelligence allows you to deploy counterintelligence strategies inside of your organization (to counteract common supplier tactics such as divide and conquer) while also proactively preparing counterpoints to their foreseeable arguments. As a result, our clients commonly tell us that they were the most prepared they have ever been before, during, and after a negotiation.

Advisory and Execution Services

​We don’t just tell you what is possible. We help you achieve it. The biggest criticism most companies have of typical market intelligence and/or management consulting firms is that they’ll tell you what “best in class” looks like but will leave you to figure out how to achieve it within your organization. If they do offer advisory services that help you implement their “best in class” then it will be for additional fees that eat away at the cost savings potential, etc.  We’re a full, beginning-to-end provider who will help you all the way through to the execution of the contract.. At TNG, we not only share a “best in class” picture but also create a realistic future state localized for your business. We help you implement that future state while also limiting risks to your organization long after our engagement ends. This is all part of our standard duty of care for our clients.  

4-Step Negotiation Process

​Our proprietary 4-step negotiation process allows us to deliver a clear and consistent service to our clients. In the interest of brevity we won’t go into detail of what each step entails, however, please know that within the Discovery and Strategy steps you will walk away with a forward looking roadmap as part of the overall engagement. If even offered, this would be an extra advisory fee from Gartner and/or any other market intelligence and/or management consulting firm. The graphic below quickly outlines our negotiation process:

Compensation & Fees

​Our compensation for these services is also entirely different from Gartner’s method. As mentioned above, Gartner’s average subscription rate is $30,000 per person plus any additional consulting fees. With this package, you have access to their standard publications, toolkits, and potentially a limited number of “analyst calls” which are quick conversations with the author of the publications. Any additional advisory assistance, if even possible, comes as an upcharge. Even with this additional cost, you will be on your own from an execution standpoint.

​We charge either an Advisory Fee based on annual contract value or we offer a Pay Per Performance option with a simple baseline calculation. We don’t charge based on a subscription service to our articles, we provide all this information for free. Our rates contain no hidden charges or surprise upsells. On top of that, we’ll help you execute the strategies we develop with you. We’re incredibly transparent with how we price our services and our clients never question the value they achieved from engaging with TNG. ​​

Combining a Broad Overview Approach with a Specialized, Niche Consulting Firm is a Winning Equation

One of the questions we hear frequently is whether someone can/should work with both Gartner AND The Negotiator Guru. The answer is yes! Gartner provides a lot of good, general information. TNG helps you zoom in on the information that is most relevant to your organization so you can determine which key findings are critical for driving cost savings/avoidance while lowering your contractual risk. Gartner is a market intelligence research firm that has a very limited advisory component separate from their articles. They do not generally provide execution services. TNG provides information without a subscription fee and our advisory and execution services are provided in the same package. Bringing in TNG to help you pinpoint your specific needs, value capture opportunities, and execution strategies will provide immediate and long-term intrinsic value for your organization. Remember, TNG will only accept you as a client if there is clear and distinct net positive impact potential… well, we can’t speak for the other guys.

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:  

1. You the client; and,  
2. ​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:

1. “shelfware” elimination
2. license optimization
3. 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.  ​

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.

​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:

1. How much you’re spending every year.
2. 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:

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