In this webinar, IT contract specialist Phil Downe of Relations Management Group explains how to do cloud-based software negotiations with confidence.
The webinar answers the following questions:
- How can you avoid vendor captivity and software traps?
- How can you prepare for a negotiation, including leveraging and timing the deal?
- How can you draft a contract and prevent contract ambiguity?
Below is a brief summary of the webinar, the presentation slide deck, the full recording, and a detailed recap.
Negotiating with IT vendors first requires understanding the potential risks and traps. Key issues to look out for are opaque/bundle pricing, over-buying of software (the vendor may try to convince you that you need), and changes in true-ups and renewals. For that reason, be cautious of adding any additional capacity during the agreement term or any additional modules. Specifically, be cautious of shelfware, where vendors will oversell subscriptions (claiming you need room for growth) to get you to buy the subscriptions on supposed 'high volume' discounts right away.
Prior to a negotiation, you should use the leverage-time graph to clearly set your high and low priorities in the ‘zone of agreement.’ Phil lists the most common areas of agreement, such as price protection for growth and renewal, as well as professional services. Most important, however, is data storage and this is often left out and included in the final stage at astronomical prices.
For nonprofits already on the cloud, or soon to be in renewal of their contract, do not wait for the 30 day expiration notice. Instead, start the renewal negotiations early, and on the quarterly financial guidelines the IT vendors work on (see the presentation/slide deck below). Finally, to prevent contract ambiguity, Phil provides a checklist of items to review in every policy, and they include: the Service Level Agreement (SLA), order forms, and Statement of Work (SOW), among others. Ultimately, the vendor will try to change the terms of first contract signed through the renewal process. So, never sign the first deal if you cannot predict what the second will look like.
Note: this slide deck has been updated from the original to a more comprehensive and thorough version (December 2018).
Note: this recording has been updated from the original to include the more comprehensive version of the above slide deck (December 2018).
Overview of Cloud-based Software
An overview of the changes in software trends and the switch to the cloud. Explains the hidden additional costs to software that are often added on by IT vendors.
Nonprofit professionals buying IT software often do not understand price variability and dynamics.
Phil outlines the most common risks to nonprofits, and they include: opaque/bundling pricing; over-buying software; eroding discounts over time; agreement traps and pitfalls; growth, true-ups and renewals; unfamiliar territory advantage.
Opportunities for IT Vendor to eventually increase their prices and deplete nonprofit IT budgets happen most frequently when:
Adding addition capacity during the agreement term;
Adding additional modules;
Especially when renewing the agreement.
Profiling IT Vendors
Explains how IT vendors operate, and how the process of buying IT software is designed to be opaque and made deliberately complicated. Despite the variety of IT companies, IT vendor sales teams across the world all sell the same IT products, with similar negotiations challenges, and operate from a written process that is practiced relentlessly.
Preparation is Key
Advises to have a solid purchase plan that can help level the playing field. This is usually described within an RFP and should contain: mandatory pricing clarity, license transparency, and viable alternatives.
Leverage - Time graph
Explains the leverage - time graph used to plan negotiations:
The top white line represents your leverage strength, and is curving down as the negotiation progresses;
The bottom line is rising steadily and is the IT Vendor’s leverage.
Advises to never go into a negotiation without setting your high and low priorities, all known as the 'zone of agreement,' for each issue you want to negotiate.
Steps in Price Negotiations
The most common areas to be negotiated within a Software agreement are:
Pricing, including Pricing Transparency & Flexibility
Price Protection for both Growth & Renewals
Professional Services, based on the SOW (including Training & Travel & Living)
Length of Term & Extensions or Renewals
Data Storage & Transaction Charges
The Legal Agreement
Shift from Perpetual Licenses to 'The Cloud'
The IT Vendor sales strategy across the globe is to move everyone to The Cloud, so companies now present a new type of software contract.
IT vendors will go to extraordinary lengths to secure a sale before the end of the quarter and especially for their year-end.
The biggest concern for nonprofits are the consequential terms and costs, which are often buried in the add-on and renewal provisions.
Always demand transparent pricing. In any negotiations, avoid bundled pricing, because it means the IT vendor will never provide a clear break-down of the “price-points” and clear definition of each subscription type.
You will not be able to negotiate a fair price for add-on license or have a good benchmark for future price negotiations if you do not know the initial license pricing.
Subscription Pricing Negotiations
Suggestions in negotiating pricing include:
Demand bigger discounts for higher volumes
Demand clip-level pricing, below the anticipated needs and up to 10 years’ growth
Consider proposing a lower than necessary subscription start volume (so that you can have opportunities for improving discounts).
You need the true net cost of each license so that you have the basis for negotiating price predictability for growth and renewals. To get to the true net cost of each license, secure both add-on pricing, and future pricing caps. The initial 12 months sets up the base price.
This can be achieved by the following:
Insist on shorter term (3-year pricing) early in the game when there is higher competition and leverage.
Then you can use the base price to move to a 5-year deal (either for higher discounts or other valuable concessions).
Renewal Process Recommendations
This is optimal time to fix over-spending in the past. Big incentives will be offered for you to go to the cloud, take your time in negotiating the contract.
If you are already on the Cloud, start your renewal process much earlier (instead of waiting for the 30 day expiration notice) by requesting a pricing schedule to the agreement. An agreement must detail the list prices in effect, your discount percentage, and your net price. Know the Quarterly financial deadlines the IT vendor works on.
For more information on the End of Fiscal Year (EFY) deadlines and how they affect your purchase of TechSoup Canada products, check out our Donor Programs for details on fiscal deadlines.
Digital transformation, artificial intelligence, (AI) and Internet of Things (IoT) are all technologies that require data storage. Vendors will often purposely leave out storage and then include it in the final stages at an astronomical price.
Many of the Cloud vendors don’t have their own Storage infrastructure; they use providers like AWS, Google, Microsoft Azure and Rackspace. During the renewal period, push for the option of a storage deal and use that threat to get reasonable price and future price-protection.
Be cautious of shelfware (which also happens in the Cloud). Vendors will oversell subscriptions (claiming you need room for growth) to get you to buy the subscriptions on supposed 'high volume' discounts right away.
The preferred alternative is to know exactly what you need initially and do a good job of negotiating pricing for:
More of the same type of Subscriptions, when needed, and
Add-on modules that possibly compliment what you are buying initially
Ramp up is a savings opportunity. Rarely will you need the full inventory of subscriptions on the first day of the agreement, so there is no need to pay for them from day one. Instead, either get a discount spread out over the entire term, or tack on three months’ free subscription at the end to compensate for the extra shelfware during the ramp-up.
Professional services from the vendor (or more likely, from one of their implementation partners) will be required to configure your specific, unique layer, that sits on top of the multi-tenant foundation.
The number of hours required to configure Cloud software will usually be inflated by the vendor.
Start the systems implementation tasks with a good set of requirements in a Statement of Work (SOW). Here is an equation to help you understand the SOW:
A requirement in the SOW will cost .5X (X is the negotiated hourly rate, times the number of hours / to configure the requirement)
A requirement added during the implementation phase will cost 2X and a requirement added after Go-Live will cost 3X.
Always check and then define the priorities of each document. These are:
The Master Subscription Agreement (MSA)
The Service Level Agreement (SLA),
The Statements of Work (or SOWs), and
The Order Forms
Remember that a policy, no matter how official it is, is not a legal obligation. Also, do not allow future order forms to alter the Master Subscription Agreement without your express consent.
Look for the audit language in your agreement, and revise it to ensure there are neither of these two:
Perverse incentives (an example of a perverse incentive is a payment to the auditor based on the dollar value of the software non-compliance found during the audit).
Conflicts of Interest (an example of Conflict of Interest is the software vendor sending in the same auditors that audit your books every year).
The Cloud brings with it opportunities: the vendors are scrambling for market share and that creates opportunity.
Start your deal early;
Try and make it as competitive as possible;
Time it for best leverage for the end of any quarter, if not Year-End;
Identify your interests, set your priorities, and set your goals;
Never sign the 1st deal if you can’t predict what the 2nd will look like;
And above all, try and have a little fun with it.