In the current challenging economic circumstances all organisations are reviewing their operating costs and planning on lower levels of capital expenditure. The IT department is not immune from scrutiny.
Most Finance Directors and Chief Executives will insist that no stone remains unturned, because the very survival of the business may rest on the outcome. Smart IT directors know this is not the time to protect “pet projects” or manipulate budgets to avoid cuts.
Be clear about what your business needs
Effective IT directors will have a clear, up to date perspective from the CEO or MD about the priorities of the business for the near term. They know what decisions are being made regarding expenditure, resources, growth and financing and what impact they will have on the IT department and how it functions.
Equally, they know that some appropriately applied polite pressure on a supplier will generally prompt consideration. Although suppliers are under pressure too, they will also be keen to avoid the loss of a customer.
When considering contract changes, experienced IT executives look for a range of potential outcomes, including:
- Price reductions
- Additional products and/or services in the current price
- More favourable terms, such as improved payment arrangements.
Understand your negotiating environment
Effective negotiators always make sure they understand the position of the other party and the relationship between both organisations. Successful IT directors will look at issues such as:
- Linkage – would a change in this contract have a consequential and/or detrimental impact on another?
- Criticality of supply – what else does this supplier do for me? Would a failure to agree a new position with this supplier have an adverse effect elsewhere?
- The health of the supplier’s business – could proposed actions put their business in jeopardy? Do they have issues with other customers?
- History – are there precedents with this supplier to negotiate contract changes?• History – are there precedents with this supplier to negotiate contract changes?
Identify your commercial levers and develop a clear strategy
- The precise terms (if any) that specify how changes to the contracted position should be handled. Most IT services contracts, for example, will include some form of “change control” procedure. Any contract where price may vary over time will include a mechanism for changes in price to be agreed.
- Rights of termination. There will usually be a clause in the contract that specifies the conditions under which the contract may be terminated and, in some cases, this may include the right for the customer to terminate without cause, simply by giving notice. The contract may also identify any charges for early termination.
- The performance history of the supplier and of the product or service provided under the contract. If performance has not been in accordance with the contracted terms, IT directors will have precise details of failure or infringement, including dates and associated correspondence.
- The level of expenditure their company makes (and has made) to the supplier. The more significant they are to the supplier’s business, the more the supplier will be interested in keeping their custom. If part of a larger group, the IT director will highlight the total expenditure that the whole group makes with the supplier.
- Future plans for use of that supplier’s products or services. A trade-off now in exchange for future commitments may be a very attractive option for both parties.
The basic components of the IT director’s commercial negotiation strategy will include:
- The objective – what they want to get from this supplier and the minimum position they will settle for.
- Opening stance – how they will present the situation, what they want from the supplier, and how this will benefit their future relationship.
- Approach to the discussion – knowing who from their organisation is best to handle which aspects and their “walk-away” position. Effective negotiators know that they may need to continue a business relationship with the supplier for some considerable time. They do not, therefore, weaken the relationship to a point where it places added risks on their business.
- Timescale – knowing when they wish to achieve agreement (remembering that admitting to time pressures will weaken their negotiating position).
- Governance – they know who needs to review and authorise their plans. They fully understand their internal governance process and procedures and know that failure comply can undermine their bargaining position if they are obliged subsequently to retract previously agreed concessions.
IT services are business critical for most organisations. Senior IT executives share the responsibility with their operations colleagues to deliver “more for less” in these challenging times. Effective renegotiation of supplier contracts is a key tool in the armoury of the successful IT director.
Andrew Hall works for Devant, the specialists in commercial contract development, negotiation and training. Andrew has worked in senior roles at Sema Group, Accenture and EDS, for all of whom he has led the negotiation of major contracts.