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Vendor contract management key to cutting costs through renegotiation

Enterprises are finding ways to use vendor contract management as a means to cut costs by renegotiating contracts down to the maintenance-clause and business-unit levels.

The economic downturn is still providing strong incentive for CIOs to practice vendor contract management -- and there isn't a contract term or condition that isn't immune to some nitpicking: Does the cost-of-living or inflation-rate clause in that outsourcing contract still represent what I should be paying for labor? Does that currency conversion clause need adjusting?

Staffing augmentation labor rates continue to be targets of cost savings for CIOs -- as seen by such questions above.

"CIOs are saying we've looked at our labor contracts, now let's have a closer look at what else we can do with our other vendor contracts or software maintenance contracts and are willing to look at it clause by clause, and term by term," said Christine Ferrusi Ross, an analyst at Cambridge, Mass.-based Forrester Research Inc.

Also under way are efforts to consolidate vendor contracts and software licenses across business units to get better pricing and eliminate contract redundancies. In other cases, enterprises are opting to eliminate aspects of their contracts completely.

Some enterprises are dropping application maintenance from their IT vendor contracts, for example. This is generally happening in cases in which an application is lightly used or has minimal performance problems throughout the year.

"There are companies canceling support altogether with major ERP vendors or switching those support contracts away from the OEMs to third parties to reduce costs," said Bill Snyder, an analyst at Stamford, Conn.-based Gartner Inc. "Both situations can carry with it a lot of risk, but customers are making dramatic cuts in that area."

A less risky option is to re-evaluate software maintenance contracts. Enterprises often sign off on preexisting maintenance and support contracts because they have been in place for so long, but CIOs can look at support clauses to find ways to lessen these costs, said Ferrusi Ross.

A software maintenance contract could be renegotiated down from a premium support level to a standard one, or the contract could be renegotiated to cover only bugs and fixes but not help desk support. "You can even renegotiate to pay for help desk support on an ad hoc basis -- which is not worth it if you have a lot of support calls, but makes sense if the application is fairly stable," Ferrusi Ross said.

Switching vendors when contract negotiations fail

Kroll Factual Data, a subsidiary of risk consultancy Kroll in Loveland, Colo., is trying to renegotiate contracts with big-iron vendors, but it isn't making much headway. "The reality is we're locked into multiyear contracts, and the big vendors aren't willing to budge, despite the way the economy is," said Christopher Steffen, a principal technical architect at Kroll Factual Data.

Smaller, hungrier vendors, however, are willing to give price breaks that may sway enterprises away from incumbent vendors. One networking vendor cut the price for a piece of hardware by nearly 50% -- a savings of more than $50,000 for Kroll Factual Data, Steffen said.

"You can save money with the smaller vendors because they're more interested in relationship building," he said. "They're willing to give you a deal if it means that you'll come back to them for more business."

The on-demand model in which cloud computing or Software as a Service providers essentially rent out infrastructure or an application can also be used as a renegotiation tool for lower prices with on-premise vendors. But be sure you are willing to go through the pain of changing technology vendors. Some incumbent vendors just might call your bluff if contract renegotiations break down, Ferrusi Ross said.

Finding concessions through vendor contract management

"There are a lot of concessions being made by vendors that aren't appearing on the contract," Snyder said. "They'll agree to drop prices for a period of time with the agreement that prices will go back up once things are better. It isn't sustainable for vendors to keep their prices low."

You can save money with the smaller vendors because they're more interested in relationship building.

Christopher Steffen, principal technical architect, Kroll Factual Data

In other cases, vendors are conceding on some price reductions if the customer does more business with the vendor, Snyder said.

It is not uncommon these days to see companies consolidating contracts down to one vendor in specific areas or across the board to gain volume pricing discounts and cut out the costs of dealing with dozens of suppliers. Virgin Atlantic Airways Ltd., for example consolidated contracts with 40 suppliers of voice and data services this month down to one provider, SITA, based in Atlanta. In another case, the governor of the state of New York this month laid out a cost-cutting proposal to merge and consolidate several state agencies' related technologies, including email and call centers.

If the choice is made to go with a less expensive provider of any IT product, and in particular outsourced IT staffing for application development, keep in mind that service-level agreement (SLA) terms should remain the same, despite cost reductions for labor. If the SLA terms are not upheld in the renegotiated contract, the staffing agency or outsourcer may put employees with less experience on your project or deem your requests less of a priority in terms of response times, Ferrusi Ross said.

Rationalize vendor contracts across business units

Business units often buy their own IT, which can lead to the enterprise losing out on volume license discounts or buying too many licenses.

In the case of layoffs, for example, the CIO can step in and ask the vendor if unused licenses can be taken off the contract, or if licenses for one business unit can be reused by another department. The CIO can also switch a licensing contract from the business-unit level to a parent-company level to realize stronger buying power and steeper discounts.

Let us know what you think about the story; email Christina Torode, Senior News Writer.

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