5 Ways to Optimize Vendor Negotiation Strategies Amid IT Contract Inflation

July 27, 2022

Contributor: Jackie Wiles

Guarantee you have all the details when faced with inflated IT vendor proposals and renewals.

In short:

  • Inflationary times add complexity when negotiating with vendors over pricing of IT contracts and renewals.

  • CIOs and their teams need a negotiation strategy and playbook to optimize deals and must insist on price transparency.

  • Use cost modeling to add rigor and power to your negotiating position as inflation hits IT contracts.

Have you received a vendor proposal in the past six months? If so, it might have demanded a price increase of 10%, maybe even 30%, for an IT contract that typically rises 3% to 5% a year. When senior management asks if that’s really warranted, it may be difficult to tell. You need a sound process for diagnosing the cause of price hikes and a strategy for (re)negotiating terms. 

Rising inflation has obscured visibility into costs just as organizations are looking to deploy technology to reduce the cost of doing business and create a competitive advantage.

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Beef up your vendor negotiating position

Vendor negotiations are a key part of IT cost optimization strategies and can be challenging even in the most favorable economic conditions; however, today’s high levels of inflation make it even harder to tell if your vendors are tying price increases to their costs or are simply trying to maintain their margins. 

“You can decipher whether seemingly exorbitant price hikes and excessive renewal costs are fair and in line with economic indicators,” says JoAnn Rosenberger Distinguished VP, Advisory, at Gartner. “But you need transparency and cost models to bolster your bargaining position.”

Your negotiation strategy and playbook should include the following five activities:

No. 1 Understand the root cause of IT contract price hikes

Require your vendor sales teams to provide root cause cost details when renewal pricing is excessive and proposals appear overpriced. Don’t settle for vague explanations, such as “due to inflation/economic uncertainty/supply chain delays.” Require sufficient detail to explain or justify the fairness of unexpected increases that result in hefty budget overruns.

Build enough time into the process to engage vendors in fact-finding discussions for both new technology acquisitions and contract renewals.

No. 2 Leverage data points from economic indicators for IT contract cost modeling

Price and cost indexes such as the consumer price index (CPI), producer price index and employment cost index (ECI) are available from public sources. Monitor them to help you estimate vendor pricing and forecast future price changes. Building such data into your cost models also bolsters credibility in your negotiating position (see No. 3).

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No. 3 Include cost models in your negotiation playbook

Rigorous cost modeling that includes publicly available information can help you in negotiating a fair price increase.

Imagine an application maintenance service provider sends an annual renewal statement of work with an 18% increase in the maintenance and support fees, stating that the increase is due to labor shortages driving up internal staffing costs.

Your analysis, however, shows the local ECI rose just 4% in the prior year. Using this as a “should cost” model can help you counteroffer for a fairer renewal price.

 

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No. 4 Tailor your negotiation playbook to be vendor- and deal-specific

Identify additional tactics that are vendor- and deal-specific to further improve your negotiating position. 

You can, for example, time the negotiation to align with the vendor’s quarter- and/or fiscal-year end date or consider lower-cost alternatives, such as offshore providers with decreased labor rates. Perhaps incentivize your vendor sales team by letting them know that if your counteroffer is accepted, you would be open to evaluating an option for a multiyear deal.

No. 5 Ensure your negotiation playbook includes IT contract terms and conditions

Once you get a vendor to agree to your counteroffer, don’t sign too quickly. Every negotiation is an opportunity to capture concessions and improve terms and conditions. For the application maintenance service provider in No. 3, for example, you could cap future price increases to ensure you’re not back where you started in a year’s time, facing the same 18% (if not higher) renewal price increase.

Adding the right price protection language to your IT contract protects you when economic conditions are unfavorable — and it gives you a cost benefit when they return to normal. 

For example, if CPI is the index most applicable for your IT contract, add provisos like “whichever is less” so your contract language (with legal counsel approval) is similar to: “In the event you (customer) elect to renew, increases will not exceed CPI or 3% (whichever is less) over the pricing referenced in (Appendix X, Table Y).”