Contract negotiations can be more of a black art than an exact science because there are no real hard and fast rules to follow and you must "follow your nose" as the negotiations develop. It's essential that you have a plan, but do not be surprised if you have to step back and recalculate more than once. Let's look at some steps to help you navigate the software contract negotiation process for your organization.
1. Vendor salesforces are not your friends
The salesforce for a particular vendor will descend on you with endless methodologies and approaches, and each vendor's solution will be different
from the next. It is important to remember that, while they are not the insidious salesmen they are often portrayed to be, they are still people with sales targets to meet. They'll be keeping one eye on their numbers in addition to finding the right solution for you. But responsible vendors will still be looking for the right solution for you, simply because if they don't, they know it will end badly and the only people to get rich will be the lawyers.
2. Document your business requirements in an RFP
Make sure you have your business requirements solidly documented, and send those out to the various potential vendors in the form of a Request for Proposal (RFP) Include not only your requirements but also what you expect a vendor to provide and in what form you would like to see this provision. This will allow the vendor to do two things: firstly to respond to the actual requirements and, secondly, to allow the vendor to include its value-add proposals. Make sure you leave the vendor room to maneuver and suggest alternatives. Do not be too rigid.
3. Set a timeline for getting proposals back
Give each vendor one month to respond, and provide them with both a business analyst and a technical associate to contact if they have questions. Make sure you have an executive sponsor for the project who can moderate and approve the answers to any such questions before they are sent back to the prospective vendors.
4. Evaluate vendors
When you've received proposals back from your vendors, your next job is to evaluate them to select the best vendor to move forward with. As a rule, try to avoid falling into the trap of sitting through endless rounds of presentations. Give each vendor one opportunity, and then move forward with the one that has met your requirements on paper and has given you a concise presentation without endless sales and marketing babble. Look for the substance beneath the style.
5. Walk into negotiations with all your data
Before negotiations commence, gather input and advice from your executive team in terms of the cost of the product. Some companies will be able to make a major purchase outright but will only want to pay a small amount for ongoing maintenance; others want to keep the initial purchase cost down but won't mind paying a bit more for ongoing maintenance charges. Your vendor will come up with an optimized price based on the information you supply. The vendor will also likely suggest that a longer contract term (5 to 8 years rather than 3 to 5, for example) will present all parties with a good solution; however, this is a double-edged sword. So, make sure the product is either flexible enough to mold to your business in that time or can be removed without major cost to yourself in the event that you choose to move away from it before your agreed contract period is up.
6. Negotiate to your advantage
Choose your preferred vendor, and then get negotiations underway. The key points to keep in mind here are (1) the initial cost of the product,
(2) the annual support/maintenance charge, (3) the actual physical product support, (4) company sustainability (there is no point choosing a fantastic product that is a 100% fit if your vendor is insolvent or its future as a company is uncertain), (5) professional services to install and commission the product and then train your administrators or user base as a whole.
When negotiating price, remember that any vendor will be armed with a list of discounts, offered because you are a government, educational, charitable organization and so on. The scope for discounts will depend on the competition within the market for the solution the vendor offers. To speed the process, you should share with the vendor some (but not all) of your budgeting information for the project at hand. This gives the vendor an incentive to come to the table with a realistic price for the product based on your proposed budget. (Better that they make a sale on your terms rather than no sale at all.)
It also helps to be armed with the cost of other vendors' solutions, and to discuss this with the salesforce. However, remember that the vendor will want to include a maintenance charge and/or increase the contract period in order to bring the numbers back up: you know that, and they know that you know that. The vendor may have done some cost distribution across the itemized quote: Make sure the quote has the exact cost for each component. This may make some lines look expensive and others look like a giveaway, but it will help both parties come to a true cost and make an informed decision.
Annual maintenance charges are often a major sticking point because, all too often, people just look at the likely headline price and budget accordingly. Be aware that at least 15% of the purchase price of most software is going to be your annual outlay for support to that one supplier alone. Discuss the annual increases to that starting price, and try to keep it down to inflation plus 1% to 2%.
7. Watch out for hidden costs
Bear in mind that you also need to factor in the support costs of the server-side hardware to install the package(s) on, as well as the costs of any ancillary services. The vendor will tell you the cost of its package, but it may leave out any cost for SQL or Oracle databases on which its product resides. If the vendor has included these costs, be sure it has inflated them in terms of software cost and professional services to install and commission those services.
These packages, too, have initial purchase and maintenance costs that you may already be paying to Microsoft and/or Oracle or others. If the vendor has included them in the costs, do not be shy about handling these purchases yourself if the price model makes more sense. Make sure you inform the vendor in writing that you will provide hardware to the vendor's specification and other software that it requires. Also, double check that it then re-submits its price quote with these line items changed to show zero costs -- and make sure that the written contract aggrees with those numbers as it relates to supply, configuration and maintenance of any dependencies such as third-party hardware, software and contracts.
8. Carefully review terms and conditions
Review the terms and conditions (T&Cs) carefully. The standard T&Cs that a vendor brings to a table are never tailored to you as a customer. The items may include yearly, quarterly or monthly charges for ongoing maintenance, opt-out restrictions, as well as other aspects of the contract. The vendor's salesforce will not typically be hung up on these T&Cs and will be willing to negotiate to make the sale. In reality, and so long as the install and commissioning Project Initiation Document is tightly defined and agreed upon, the T&Cs will very rarely be referred to. However, be practical: If you are not a large, global entity, then there may be very little point in sticking doggedly to an item in the terms that you don't necessarily agree with.
9. Purchasing strategies
When to buy is incredibly important. If you are on a tight budget, you should find out when the vendor's fiscal year ends -- some companies run on a January-December fiscal year, others on a July-June or another schedule. You will find that sales teams are able to offer some hefty discounts at this time, especially if they still have some distance to make on their individual sales quotas. If you are not constrained to a drop-dead implementation date, it may well be in your interests to hold off on your purchase until you are close to the vendor's year-end; it will know what you are doing and may come back to the table with some improved numbers. It then becomes a simple game of poker, advice for which can often be similar to approaching a Vegas gaming table -- discussing the finer points of pricing and squeezing an extra percentage point discount on the purchase price, professional services' day -rates and so on.
Don't leave the negotiation process until too late though; you have to factor in the time it takes to push the sale and any contract signings through your organization's internal finance and legal areas. Often, those people don't have a say in the purchase but will want to show that they are trying to gain best value and show due diligence in the selection of a vendor.
Mark Arnold (MCSE+M, Microsoft MVP) is a Technical Design Authority for the Capita Group, a U.K.-based business process reengineering organization, where he provides advice and technical designs to the business process transformation teams for internal customer and local/central government accounts. Arnold has been a Microsoft MVP in the Exchange discipline since 2001, contributes to the Microsoft U.K. "Industry Insiders" TechNet program and can be found in the Exchange newsgroups and other Exchange forums. You can contact him at firstname.lastname@example.org.