Why preparation is the key to successful software contract negotiations

All the hard work of negotiating a software contract happens before you sit down at the virtual table and start talking. Preparation is absolutely critical. Taking a detailed and methodical approach when preparing for major negotiations or contract renewals is key to achieving favorable technical and commercial outcomes.

You also need to define a clear negotiation strategy. What do you want to achieve from these negotiations? What does the best contract for your business look like right now? How are you going to achieve that result and what is going to be the vendor’s strategy? How will they respond to your approach and position?

Starting point: What is in your current contract?

To start, you need to understand what licenses you have purchased and which products and features are included in them. Many customers don’t realize that the products mentioned in their bill of materials (BoM) are often actually a bundle of products and features that they are entitled to use, rather than a single product. Not knowing the exact details of what you are entitled to use might lead to overestimating the gap between actual usage and your entitlements. In other words: you might conclude that you need to buy more than you really need.

Anything that is underutilized could be the basis for cost savings. But, counter-intuitively, anything that is seeing more use than expected, and is contracted for, could be the basis for better-scaled pricing too.

This is also a good moment to rationalize your existing IT estate. Cloud services and wider procurement privileges mean that IT departments have less of a stranglehold on IT procurement than in the past. For instance, we see many customers who discover that every department has purchased a different project management tool. Making a strategic decision to standardize on just one offers savings in licensing, and in time spent negotiating and managing those licenses. And it likely provides security benefits as well.

Making sense of bundles – what do you actually need?

Moving to the cloud has multiplied complexities for enterprise IT. Most providers now offer a plethora of bundled services – these can be even more difficult to make sense of as you look to achieve the best value for your organization. We often see a strong temptation to over-provision – to buy a more comprehensive bundle than is needed to cover current and future usage, to avoid unexpected costs later on. Having a clear understanding of your usage and regular monitoring will help you make the best choice, both in terms of cost and functionality.

Looking forward

Predicting future demand is another challenge. We often find that, although higher levels in the organization have a clear view on the business strategy and future plans, this might not be common knowledge for the people in procurement and IT who are driving negotiations with software vendors. If you’re negotiating a 3-year contract for a central part of IT infrastructure, you need to know whether senior management is planning a series of mergers and takeovers or divestitures. Is your sales and marketing team planning a big shift to more data-driven campaigns? How can IT support the future direction of the business? In short: you need involvement from across the business and you need to include multiple departments and disciplines.

If procurement alone is involved, there is a tendency to push hard on price but not necessarily make the best decisions for the business as a whole.

When to start?

Precisely how long you will need to negotiate differs from organization to organization. But you should bank on at least six months to get ready for a serious negotiation. That includes time to clean current systems and to get the right data on usage and on your existing entitlements. You might also want to look at standardizing the software you have purchased already and ensure you are aware of any duplicate software for certain functionality. Standardizing on a single product will more often than not strengthen your negotiation position and reduce overall spending. Last, you will want to include time to determine future demands and evolution of the overall business.