By Stephen White, Senior Director Analyst at Gartner
Inflation is greatly impacting consumers of technology as software and cloud vendors respond to increased costs by increasing prices. Sourcing, procurement and vendor management (SPVM) leaders who are facing the effects of economic headwinds are searching for ways to reduce the short-term costs of software and cloud contracts to offset vendor price increases and halt erosion.
SPVM leaders need to protect their organizations from financial disruption and build resilience for what may yet be to come. Accordingly, they must offset cost increases by restructuring contracts, eliminating waste and creating vendor incentives. SPVM leaders can take the following three actions to alleviate financial pressure for a six- to 24-month period.
No. 1: Compel vendors to restructure contracts
To initiate negotiations, SPVM leaders can set expectasoftware, cloud costs, Sourcing, procurement and vendor management (SPVM), gartnertions by writing to all their major vendors indicating they are taking action to address financial constraints as a result of the economic climate. It is important that leaders take a methodological approach during this process, informing vendors all proposals will be reviewed.
As leaders notify their vendors, they must prioritize the potential concessions in relation to contract terms. Modifications could be:
- Transition to payment by installments, payment on a quarterly or six-monthly basis for instance in lieu of annually.
- Change your standard payment terms.
- Apply price ceilings or price caps.
- Make temporary contract extensions.
- Extend periods or additional services to utilize cloud infrastructure and platform services contracts.
SPVM leaders can refer to their vendors’ finances and public statements when entering these negotiations and be ready to quote their statements on the crisis in order to convince them to negotiate.
No. 2: Reduce, suspend or terminate shelfware and support, and postpone audits
During a time of crisis, it is important for enterprises to cut costs quickly. To deliver long-term, sustainable IT cost optimization, eliminating waste and right-sizing contracts is key. Prioritize reducing upcoming payments, as it will be difficult to obtain refunds or credits related to payments already transacted.
SPVM leaders can take advantage of the following cloud-related cost-saving options:
Review SaaS Contracts for Downward Flexibility
Terms of SaaS contracts and characteristics of usage vary by vendor. In some cases, annual adjustments can be made within the terms of the contract, to eliminate shelfware. Where that isn’t the case, if there are any add-on products or enhanced support levels that are not necessary, SPVM leaders must negotiate to have them removed. Additionally, if organizations have shelfware without plans for usage in the near future, those too should be negotiated for termination to achieve cost savings. Alternatively, SPVM leaders may negotiate a credit instead of paying for shelfware.
Get Free or Usage-Based Licenses for Peaks
Organizations that are experiencing spikes in usage, such as call centers being overloaded with customer calls regarding impact and risk, should negotiate with their vendors to obtain additional licenses free of charge. It is important for SPVM leaders to negotiate with their vendors on usage-based pricing and short-term licensing to avoid these peaks.
SPVM leaders can evaluate use cases and take advantage of the following software-related cost-saving options:
Park Support and Maintenance
Negotiate to park support and maintenance on perpetual licenses. By doing so, SPVM leaders have the option to restart support and maintenance without reinstatement or back-maintenance fees. Support and maintenance is a lucrative revenue stream for vendors. Identify the profitability of the vendor’s support business in order to bolster demand for a return to support and maintenance without reinstatement fees.
Move to Third-Party Support
Up to 50-60% of existing maintenance and support fees can initially be saved by moving to third-party support. Pursue third-party support providers for free-of-charge services such as interoperability support, custom code support and upgrade assistance. In the longer-term further savings can be made, as many third-party support providers do not have any support bundling rules to prevent customers from dropping support on unused licenses.
No. 3: Increase negotiation leverage
SPVM leaders must remain realistic when negotiating with vendors, who will not concede to demands unless they identify a context that benefits them.
Be prepared to articulate reasons why vendors should concede to demands and persuade them that cooperation is in their best interest given that financial return and value are key outcomes sought from all providers at this time.
Negotiation leverage techniques:
- Avoid antagonizing the vendor.
- Explore vendor interests beyond immediate revenue.
- Exploit increasing volumes and strategic alignment of priorities.
- Challenge the vendor to enable productivity.
- Evaluate competitors, alternatives and options.
- Conduct competitive vendor rationalization.
Executive leaders must significantly cut costs and improve cash flow during a time of crisis. To do this, SPVM leaders must consider restructuring software and cloud contracts by following these three techniques to successfully negotiate these change