By: Phil Downe, IT negotiations specialist and principle with Relations Management Group Inc
Consider the following situation. Your nonprofit wants to purchase Constituent Relationship Management (CRM) software, and your favourite platform is being offered at a discount through a third-party software vendor. The vendor’s company seems reputable and gets great reviews for customer service. Discounted software, solid reputation -- it seems like an easy decision to make the purchase.
However, before purchasing any IT solution from a vendor, you always need to ask a few critical questions. Otherwise, it’s easy to end up locked into a deal that seems great now but becomes unfair and unaffordable in the future.
In this post, I’ll walk you through some of the most common pitfalls that nonprofits encounter during IT negotiations, as well as strategies for negotiating with confidence.
Understanding the negotiations landscape
Some vendors sell their own proprietary software, while others resell software made by other companies. Regardless of the product they’re selling, for-profit vendors are out to make money -- and unfortunately, some use unscrupulous tactics to pursue this goal.
For example, vendors will often promise more functionality if you purchase another layer on top of the software’s base module(s). Your personal attachments to the project could begin to outweigh your objective criteria. If the deal seems too good to be true, ask yourself: with this added functionality, am I getting the same impressive discounts as originally offered? How much will the configuration and integration work cost? What training is involved? What are the long-term costs? If the vendor is not upfront with these answers, you need to step back and ask more questions.
Another vendor tactic is to exploit the nonprofit sector’s positivity bias and potential unfamiliarity with the latest reiterations of software licensing. To protect yourself, you need to understand what licenses are, how they function, and how they are packaged.
Licenses today come in a variety of flavors but can usually be divided into two camps. The first are on-premises server licenses; these carry a higher up-front cost and annual support fees. The second are cloud-based monthly subscriptions (Subs), which is quickly becoming the more popular approach throughout the tech industry.
The capital expenditure (CAPEX) for a perpetual on-premises license is often significant: it includes the cost of hardware, first-year support and maintenance, storage, and floor-space. With subs, the user doesn’t have to bear any of these costs and instead pays a monthly fee for a Software-as-a-Service (SaaS) or Cloud-version of the same software. The vendor does the heavy-lifting and maintains complete control of the product being used in a multi-tenant Cloud environment.
Subs don’t carry the separate annual support charges because those costs are now rolled into the mandatory monthly fee. If your organization prefers incurring operating expenditures (OPEX) over CAPEX, then the choice between on-premises versus subscription-based solutions seems very straightforward. And this is exactly the vendor’s goal: to persuasively lay out the solution in the way you most want to see it. But are you getting the full story on total costs and pricing transparency going forward?
Giving Yourself Leverage
Let’s assume your vendor is trying to sell you basic, highly discounted modules plus some “other software products,” each at various quantities per month and each with its own monthly price point. The focus will always be on the low, total monthly net cost and all the wonderful benefits you will derive from them.
Each of these subscriptions are sold in 12-month packages, but the low monthly cost-benefit analysis still makes sense. Then, to give the buyer at least the perception of choice, the vendor will usually present multiple offers. These come in a variety of options, but let’s stick to the following three:
- the required Subs for 12 months, paid in advance,
- the required Subs for 36 months with three annual payments in advance
- the required Subs for 36 months with a single payment in advance.
The first will have the highest annual cost, the second will be cheaper because of the three-year commitment and the third will be the best value because it’s the same as 2., plus an additional pre-paid discount. The software reps will always push you towards the option that translates to the highest revenue for them.
Somewhere along the line the individual Sub price points tend to get lost. You may have a good idea of what you think you’re paying for each subscription, but the vendor will likely resist going back to the minutia and steer the conversation elsewhere. They will avoid detailing any price-points in the schedules to eliminate benchmarks to support your future renewal negotiations.
This is a common bundling technique you would be well-advised to avoid. Ask the vendors for the pricing detail right up front in the Request for Proposal (RFP), when there is still lots of competition for your business. Have them define every license by name with a succinct definition as to its use. Have them disclose any restrictions such as read-only, casual user, power-user, enterprise, etc., and when you might be required to buy an additional one or an upgraded one.
Then, once you have clear definitions of each license subscription, insist on the list price for each. Not a total list price -- for example, of $800,000 for 225 Subs for three years marked down to a bargain of just $500K -- but individual, line-item list prices over a potential range of licenses required and the discounts with their volume clip levels (brackets such as 1 – 20 user licenses, 21 – 50, 51-100, etc.)
Always keep in mind that in 36 months you (or your successor, once you land your next promotion) will have to re-negotiate the price on the renewal subscriptions. What kind of leverage are you leaving yourself / your successor with if there are no pricing benchmarks? None. The vendor is now controlling the negotiation. You have two options and realistically they are to either reduce the number of users or purchase an entirely new software system. You’ll have neither the time, the inclination nor the budget to do the latter, and the former is just another excuse for the vendor to increase the price for lack of volume.
You must leave yourself and your successors with some relevant pricing benchmarks to conduct those negotiations. If you don’t, it’s no longer a negotiation -- it’s a hostage taking.
In future posts, I'll go into greater detail around key negotiating tactics.
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