Ready, Set, Bargain
When Norm Fjeldheim sits down at the negotiating table with IT vendors these days, he feels the odds are stacked in his favor. As IT spending overall remains flat and many vendors struggle to find business, Fjeldheim, CIO at Qualcomm Inc., has discovered that now is the best time to renegotiate deals and bargain on new purchases in search of lower costs.
"Its very much a good time to do [negotiations] because vendors are hungry," said Fjeldheim, in San Diego. "Theyre willing to trade off certain things to get longer-term deals or to get a deal at all."
Even otherwise-hard-nosed vendors such as Oracle Corp. in the past year have courted Fjeldheim with offers of savings, albeit often in exchange for longer-term deals. Fjeldheim estimates that over the past three years, he has cut 40 percent in potential costs from his IT budget by negotiated discounts and reductions in software, hardware and services.
No doubt, experts say, with the spending slowdown, IT has become a buyers market. A year ago, about 40 percent of CIOs were focused on squeezing more savings out of vendors, said Howard Rubin, a research fellow at Meta Group Inc., in Stamford, Conn. Today, as many as 60 percent of IT executives are concentrating on vendor negotiations to cut budgets.
The opportunity for enterprise customers to get discounts on new purchases and renegotiate existing deals cuts across technologies, from enterprise software such as enterprise resource planning and CRM (customer relationship management) to hardware and IT outsourcing and consulting services.
In fact, the only exception tends to be where a single vendor holds a dominant market share, such as Microsoft Corp. with Windows or Computer Associates International Inc. with mainframe tools, said Ed Hansen, a partner at law firm Shaw Pittman LLP, in New York. Still, with many IT products and services, IT managers are successfully negotiating substantial savings on new deals and renegotiating existing contracts for concessions such as deferred payments on maintenance costs and more favorable rates on continuing services, experts say.
But theres a catch: IT managers need to strike a balance, negotiating savings without damaging their relationships with vendors, especially those that provide critical software or services such as enterprise applications or data center hosting.
"Its not in the interest of the CIO to negotiate to a level that hurts the vendor for a short-term gain and a long-term loss," said Barton Goldenberg, president and founder of CRM consulting company ISM Inc., in Bethesda, Md., and an eWeek contributing columnist. In CRM software alone, Goldenberg said, the typical range of discounting on software for new deployments this year has been between 25 percent and 75 percent. For those who have already purchased the software, reductions in maintenance and support coststo no more than 15 percent to 20 percent of the discounted software license priceare readily available, Goldenberg said.
To cash in on their stronger negotiating position, however, IT managers need to do their homework. That means gathering information on pricing trends in the specific market and considering alternatives in advance in case a vendor is reluctant to negotiate. It also means knowing exactly what software, hardware and services your enterprise is using and tracking your vendor contracts to avoid, for instance, missing negotiation opportunities when a contract comes due for renewal.
Fjeldheim, who started his campaign of renegotiating with his vendors five years ago, does exactly that type of homework before asking vendors for better deals.
In 1999, Fjeldheim opened discussions with the companys main telecommunications provider, AT&T Corp., of Basking Ridge, N.J. About a third of the way through a two-year contract with AT&T, Qualcomm officials realized the long-distance rates they were paying were far higher than the going rates in the market. They asked AT&T to agree to cuts. AT&T offered a 30 percent cut in exchange for extending the contract for a year or two; Fjeldheim wanted a 60 percent reduction, based on his research and talks with competitors. AT&T wouldnt budge, so he signed with Sprint Corp. when the contract expired at the end of 2000.
Having backup vendors lined up is critical in renegotiating when the prices in a contract are out of step with the market, said Julie Giera, an analyst at Giga Information Group Inc., in Cambridge, Mass. It demonstrates to a vendor that a company has real options, Giera said. But the company must also be willing to make the switch and be certain that any alternative vendor can meet its needs and is viable, she said. "Youve got to do what youve got to do," she said. "There are good deals to be had out there."
Qualcomms preparedness in its telecom dealings had a positive side effect on its relationship with Sprint, Fjeldheim said. The new telecom provider, aware that Qualcomm was willing to switch before, has been willing to renegotiate rates as they shift in the market. In recent months, Qualcomm has executed midcontract renegotiations with Sprint covering both long-distance and wireless service.
"We established with Sprint that this is the kind of working relationship we want to have," Fjeldheim said. "Were not trying to beat them up [on price], but if theyre offering good rates to other customers, then we expect to see those good rates as well."
As important as market knowledge is in wrangling a better deal with a vendor, enterprise IT buyers must also have internal processes in place to track and manage their vendor contracts so they know where to concentrate their renegotiation efforts. When it comes to software alone, a lack of vendor contract management is blamed for enterprises paying between 28 percent and 33 percent more than they need to. Thats because many enterprises miss out on volume discounts or buy maintenance on software they dont need, Gigas Giera said.
Enterprises need to have a centralized group or person handling IT contract and asset management to keep track of whats being used and when contracts are due for renewal and to uncover the ones with the most potential for savings. IT asset management software can also help by tracking the hardware and software installed and analyzing usage patterns, experts say.
Just knowing what software employees are usingand not usingcan uncover savings. IPNet Solutions Inc., in Newport Beach, Calif., shaved 40 percent off its Microsoft licensing fees when it renewed licenses on a range of Windows operating systems, Office and developer tools at the end of last year, said Florencio Espinoza, a senior systems engineer and the group lead for IT at IPNet. Those savings primarily resulted from identifying and dropping licenses that users no longer needed. IPNet uses an IT asset management tool from Express Metrix LLC, of Seattle, to track software on 120 desktops and servers and measure usage patterns.
Usage data helped IPNet decide, for instance, that it could reduce the number of Microsoft Access database application licenses it paid for. Espinoza found that only about 20 percent of the business-to-business software companys software engineers were using Access, meaning that the other 80 percent could be switched to a less expensive Microsoft Office suite without Access.
IPNet has made similar strides in its licenses for anti-virus software and in deals with primary hardware vendor Dell Computer Corp. The company plans to focus even more on usage data to find savings, especially as IT adjusts to the employee downsizing and budget restrictions of recent months, Espinoza said.
"More recently is when we really realized that the economy has changed and the marketplace has changed, and we need to take an even closer look at the resources we have, what inventory we have, and be very careful about what we choose to renew or purchase," Espinoza said.
In their zeal to gain lower prices and extra freebies from vendors, IT managers should be careful not to go too far. Unreasonable attempts to force down prices can backfire. Often that leads vendors to seek more stringent contract terms to help make up for the loss of revenue, such as more restrictive termination conditions and caps on vendor liability, Shaw Pittmans Hansen said. Unreasonable discount demands now can lead to tougher negotiations when the economy recovers and vendors remember being squeezed. And switching to a vendor with rock-bottom prices can lead to subpar support.
An effort to cut Web hosting costs backfired on John Antal when he oversaw Web site operations for Aqua Hawaii Inc., a seafood producer in Honolulu. Under pressure to find a less expensive vendor, Antal in November decided to switch to Advanced Internet Technologies Inc., in Fayetteville, N.C. AITs rate per Web site was about half of what Aqua Hawaii paid previous host company HostPro Inc., which became Interland Inc. in August following a merger.
Immediately following the switch, Antal said, he began having problems with AITs customer and technical support. The hosting company didnt promptly switch over domain names, he said, leaving Aqua Hawaiis six Web sites inaccessible. By the end of November, frustrated by unreturned e-mail and long waits for phone support, he switched to Web hosting services from Dell Computer Corp., even though they cost more. Hes still haggling with AIT to retrieve control of domain names that had been transferred and remain offline and to be refunded for charges he said were applied after he canceled the service.
"The savings, in retrospect, with all the trouble was not worth it," said Antal, now a consultant for Aqua Hawaii. "The few dollars savings do not outweigh all the trouble of not having a Web site up or not being able to use our domain names."
(AIT officials maintain that the company promptly responds to customer service and support requests and dispute that they owe a refund since they didnt receive a formal cancellation until January and because the hosting agreement stipulated a minimum of six months of service.)
Ending up with poor service or software isnt the only danger in seeing rock-bottom prices. If a vendor accepts an unprofitable price, it could be a sign of its nearing insolvency, experts say.
Thats why Qualcomms Fjeldheim ensures that any renegotiated contract also has some benefits for the vendor. He seeks frank talk with salespeople to uncover what goals theyre trying to meet so that he can structure deals to save Qualcomm money in the long term while keeping the vendor viable.
That could include, for instance, building in a longer term in exchange for lower overall costs. When Qualcomm needed additional database and tools licenses recently, for example, Oracle was willing to discount maintenance and licensing costs in exchange for extending Qualcomms overall contract to a new three-year term. Fjeldheim figures the move saved Qualcomm about $2 million over the life of the deal.
"Were not trying to kill the goose that laid the golden egg, and sometimes its difficult for me to judge if theyre being so short-term-focused that theyre not going to be there long-term," Fjeldheim said. "We try to watch that. We want long-term relationships with these guys."