A Best Practices Guide for IT Systems Procurement

Successful IT executives rely on a number of hard-learned approaches to get the best deals and highest qualities of service from their IT systems vendors and suppliers. The May 2003 CIO Forum in New York City, managed by Richmond Events, brought together hundreds of top-tier CIOs, CTOs, and systems administrators for a series of seminars, workshops, and discussions.

Following dozens of interviews, we assembled a set of best practices for systems licensing and negotiations.

The following questions and answers outline the tough-love approach to services acquisition that IT executives now favor. The goal is to make the often awkward and confusing relationship between systems buyers and sellers into a cooperative arrangement that will benefit both organizations.

Question
What strategies should IT buyers embrace before they begin contract negotiations?

Answer
Harness your purchasing power by consolidating buying across your entire organization (even globally). Collaborate with relevant stakeholders in your organization. Seek input from technical, legal, purchasing, financial, and overseas divisions. Don’t allow vendors to negotiate with numerous subsidiaries.

Negotiate on your terms by using time to your advantage. Re-open contracts whenever the opportunity presents itself, such as the current economic downturn. If your use of systems is down, renegotiate the contract. Make time work against your supplier by knowing when their fiscal quarters and year end; seek concessions then.

You must know what you want from a purchase agreement before you begin. The vendor knows what they consider the best terms of success—you should too. Develop a sense of what service level agreements (SLAs) will provide you with security, and know your switching costs and exposure in order to recognize when, in fact, you have a good deal.

Know the long-term viability of the vendor. Investigate prospective suppliers using quarterly SEC filings, recent stock price patterns, and information on inventory levels and channel activity. Remember to distinguish between a vendor that is hungry and a vendor that might soon go out of business.

Question
When we get to the actual negotiations, how can I keep the upper hand?

Answer
Designate a person or small group to speak with one voice for your company. Get the same from the seller—one person with the authority to act. Your representative or group should have a core competency in systems contract negotiations and licensing. If not, you should outsource the negotiating function.

Know the seller’s weaknesses and exploit them. Gather market data, understand the seller’s inventory pressures, and seek outside counsel on how to best proceed. Talk with reference clients or others that have recently participated in similar negotiations.

Use your heterogeneous systems to your advantage. For many suppliers, this is a problem.

Competition between vendors is great for you, so pit vendors against each other when practical. Also, use Linux and the open-source options you have to put pressure on closed-systems sellers.

Question
How can I avoid an acrimonious negotiating environment and still obtain good value?

Answer
Top executive contact between your company and the vendor can be very beneficial. Look for cultural bonds or affinities that link your organizations. This promotes the partnership and marries your company to the vendor’s. Trust at the top can get negotiating roadblocks removed quickly and agreeably.

Offer to be a reference account to get better terms. Investigate other quid pro quos that will reduce your costs, such as co-marketing. To gain concessions on tactical sales, offer the seller a strategic win by accepting their frameworks or other products—you can always change your mind later.

However, don’t be too tough; that can be counterproductive. Be fair with the vendor and insist on fairness in return. When you need help from a supplier, tough terms can come back to haunt you.

Question
How will the seller try to take advantage of my organization and me?

Answer
Vendors will work to place the risk on you so they can sell you more maintenance than you may need. Limit your liabilities, seek extended warranties, and don’t order maintenance until warranties are up. Discuss with your vendor maintenance during the license term, not after.

Too often, the vendors will change the method of measuring and tracking use patterns and license costs. It may sound basic, but you should understand the actual terms of the agreement and contract.

The seller may threaten an audit of your current use as an intimidation tactic. Be prepared to do it. Don’t let the seller place you on the defensive with audit concerns, because the cost of switching vendors is high. Do an internal audit beforehand to know your real position; the knowledge you gain will save you money.

Question
In the actual contract document itself, what should I look out for?

Answer
Get legal and consultative review. You should control the contract; don’t accept the seller’s version. Add the seller’s paragraphs or points as appendixes while you negotiate. Examine the contract to expose vendor gotchas.

Always be aware of the exit and renewal aspects, and be prepared to negotiate anew on your best terms. Avoid automatic renewals. Be clear on the seller’s responsibilities to avoid the blame game if something goes wrong.

Insist that the seller notify the customer when terms in the contract change. If there’s no notification from the seller, the buyer is not responsible for any changes.

By trying to cover every possible adverse eventuality, a contract can be written to fail. It’s better to keep the contract simple and to work toward successful completion with a sense of cooperation and partnership.

The Yankee Group originally published this article on 20 May 2003.