As Verterent has grown as a company, our team has established a set of skills and guidelines for negotiating agreements with technology vendors. While the below may not be the approach everybody chooses to take, we found these points to be extremely useful in executing and updating agreements.
At least every three years, annually being preferred, an organization should review and discuss the terms of agreements with vendors. A Master Services Agreement ("MSA") and any attached Schedules or Statements of Work ("SOW") should be revised and executed during the periodic review. This seems like common sense, but organizations are more frequently letting agreements extend in perpetuity through automatic renewal provisions and lack of spend oversight. This is more prevalent with organizations that have a substantial operating margin with healthy cash-flow.
It is also quite common that additional services are appended to a MSA well beyond the recommended three year review simply due to time constraints and deviations from procurement processes and procedures. Performing an extensive review with an organization’s legal and procurement teams will reduce consternation in the future when changes to the agreement are required.
The first decision to make is: Whose agreement template (a/k/a paper) do we use for the MSA? Using your paper will most often provide the greatest benefit to your organization during the negotiation process. It will significantly shorten the time that your legal team needs to review and amend the agreement, but it mainly includes terms that are weighted in favor of your organization over the vendor. Do keep in mind that the larger technology providers (e.g. Microsoft, Oracle, Cisco) will adamantly refuse to use your paper. Their legal and procurement teams process thousands of agreements a year, and using your paper is extremely inefficient and costly from their perspective.
Whether it is your paper or theirs, the first thing to strike during the redlining process are automatic renewals, termination, and non-renewal notification obligations. These often get organizations in trouble as many vendor agreements denote a non-renewal notification requirement of 90 to 180 days. Unless your organization is diligent, you may forget about the pending renewals and enter into the non-renewal point of no return.
Back when software was simply purchased and support/maintenance was tacked on for a fixed term, it made sense to purchase twelve months forward as the services and products purchased were not governed by usage. As vendors adopt the subscription model, it doesn’t make sense to pay so far in advance for services that may change (e.g. decrease, increase, upgrade, downgrade, bundle) during the course of the term. Requesting monthly or quarterly payment terms is becoming more common due to the consumption model many vendors offer.
The vendor will often push back on this as their finance team prefers to recognize the entire revenue amount up front, effectively leaving very few options to cut the service term short. The phrase “a bird in the hand is worth two in the bush” comes to mind in this scenario. Describing the potential to increase (always start with that first) or decrease usage of select services and products will provide a solid ground to base your request.
Positioning the request in this manner will entice the sales representative to think about the potential, which may be very small, to lock in additional purchases down the road. If you succeed in establishing favorable payment terms, your finance and accounting teams will be quite appreciative. Having that extra cash on hand gives your organization options; refer to the concept of Time Value of Money (“TVM”) for more information.
Vendors do not want to be locked into commitments especially as it relates to financial and regulatory liability. Many vendors will intentionally use language in their agreement that is vague and easily escaped if challenged. Indemnification and liability caps will be littered throughout their agreement, and it is up to your legal department to establish favorable obligations in the event of a data breach. The other side of that coin is the responsibility of the technology professional reviewing the agreement. Defining a standard Information Security and Privacy Addendum, separate or combined, is the easiest way to quickly incorporate baseline security and privacy controls into an agreement during the redlining process.
The legal or procurement representative teeing up the agreement can easily attach the addendum to the agreement without having to pull the technology team into the initial agreement negotiation round. As one size does not fit all, there is significant benefit in creating a playbook based upon the sensitivity of the data that the vendor will process and/or store. (e.g. public data, internal confidential, Sensitive Personally Identifiable Information)
Each requirement in the addendum should be assigned a sensitivity level that determines if the control is to be incorporated into the final agreement and/or countered if struck by the vendor. If there is a data breach and your organization did not establish proper security controls in the MSA, SOW, or Schedules, the respective regulatory body may find the organization to be negligent in the handling and care of the impacted data. Data breaches are expensive and harmful to your customers, and the accountability for the data is with the Data Owner. In most cases, this is your organization and not the vendor.
Now, this is the topic that most people are interested in. How do I save the organization money by reducing the price of the product? It is actually quite simple. Always assume the initial quote for a product or service is 10-20% under the vendor published price (a/k/a list). Your target should be 40-60% under list in most situations.
There is a phrase in sales which is applicable almost anywhere: If you don’t ask for it, why would you expect to receive it? All you have to do is ask for the price you want. How you do it can be an art though as you do not want to offend the sales representative, but you do want to convey what the value of the product or service is to you at that point in time. The vendor could be offering the greatest product known to the world, but it doesn’t have a lot of value to you if you don’t need it.
You do not want to explicitly denote that the product is worth X, but do use the phrase "I am comfortable at X". The vendor may unwaveringly believe the product is worth Y, but you do not have the same perceived value of the product as the vendor. “Worth” is a tricky concept as it depends on the person you are negotiating with. Focus on what the product is worth to you at that time, and you will have far greater success in hitting the higher discount pools.
Sales representatives have quotas and defined periods of time in which to hit that quota. The incentives for exceeding quotas can be difficult to comprehend for those that have never been in a sales role. In 2005, the hay day for hardware and software sales, our team recalls that eight sales representatives for a relatively well know security products and services provider generated an income of $1M that year.
Keep in mind that the base salary for a sales representative in that field during that time was roughly $50K per year. The remaining $950K+ was generated from commission, bonuses, and other incentives that are provided on the backend. Sales people will push your organization to execute an agreement and purchase in the quarter or fiscal year that most benefits them. They will use time-governed discounting (e.g. 20% off if Purchase Order received before end of June) to entice you to move as quick as possible through the negotiation process.
Your organization is not their only prospect, soon to be customer, and the quicker they can close this deal impacts how quickly they can move onto the next one. Discounts will rarely disappear no matter how hard the sales representative pushes. We’ve personally pushed deals, with aggressive discounts, into 12+ months of negotiations. They want your organization’s money just as bad, maybe even more, than you want the product or service they are offering.