Maintenance Contract Reduction a Good Resolution for 2010
January 4, 2010 Dan Burger
Are the handcuffs on your IT budget cutting off your circulation? When the bulk of your expenditures are tied up in maintenance-related costs and day-to-day operations, and one more “do more with less” speech from the boss makes you punch a hole in the wall, you need a fresh idea with a workable, realistic opportunity for success. Renegotiating your hardware maintenance and software subscription contracts could be your new money tree. How this works can take several paths.
Let’s begin with the money tree. The way this most often works is that savings from maintenance costs are moved into new projects that fit the “do more with less” description. There are instances where money is rebated as a result of the renegotiation, but the circumstances are somewhat different. In either case, it’s important to assure that existing services are not eroded and the IT budget remains under control while moving business functionality ahead.
You might think this sounds like pulling a rabbit out of a hat, but here’s why money paid into maintenance charges can be used to fund new projects.
Begin with the sales process involving hardware and software. If you are a savvy negotiator, you might get some sizable discounts–maybe in the 40 to 50 percent range. On top of that, you might also be eligible for some rebates or other incentives like education and training credits or credits toward professional services. The deal involving your capital expenditure might be pretty sweet.
Twelve months later, though, you get the first of your hardware maintenance and/or software subscription fees that, for example, could be in the 25 to 33 percent range and is applied to the list price for the hardware, operating system, and software.
A lot of companies have come to notice a correlation between lower server prices and more elaborate, more costly maintenance contracts. Not coincidentally, this is also when you start to notice the budgetary handcuffs. How do you whittle some progress for your company in this business?
When I talked with Scott Robbins, chief executive officer of Virtual Procurement Services, I asked what he would do. VPS specializes in renegotiating existing maintenance and software subscription contracts. It operates with a close eye on the IT infrastructure business and a staff that knows the sales side of IT infrastructure.
One of the keys to renegotiating contracts, according to Robbins, is going back to the salesman who no longer has a financial incentive after the first year.
“We tell the salesperson that we want to help fund a new project,” explains Robbins. “That project may be something he can make another commission on or that someone else at the VAR can make a commission on. But this new project is important to the organization (the salesperson’s customer), so the salesperson becomes an advocate for the new project.”
That may get a salesperson’s attention, but what is going to make his company want to renegotiate a contract with better terms for the customer resulting in less money for the VAR? Returning money to customers isn’t generally a well-established rule of sales.
“We are talking about taking money out of someone’s pocket and giving it back to the customer. The company that sold the hardware or software is not looking forward to my phone call,” Robbins says.
Market-tracking software combined with insider experience allows VPS to gain leverage in the negotiation process by knowing where to negotiate and to what extent. Having experienced IT infrastructure salespeople working for VPS adds familiarity to the territory.
“Part of successful renegotiating is understanding who gets paid, how much they should get paid, and how much more revenue is on the horizon,” he says. “Most IT infrastructure sales people and sales managers are faced with an inherent conflict of designing the best solution for their customer–where the customer wants it at the lowest possible price–while at the same time being tasked with getting the highest possible profit margin. That is a tough conflict to manage internally. Most salespeople manage that by explaining to customers that their company and its services are worth the extra fee that they pay.”
From the negotiating side, the negotiator knows the sales person wants to keep his customer. In this economy, customer retention is a huge priority. More so than ever, customer relationships are based on solving business problems. If the renegotiation process involves new ways to solve business problems, an IT infrastructure company will be much more inclined to work with a customer on extracting more for less. The fact that it increases good will and business value benefits the long-term customer-vendor relationship at a time when customers really need the help.
To get an actual rebate instead of a reinvestment of the savings in additional IT infrastructure is more difficult, but Robbins says VPS will evaluate what a company paying for and what it is using and how certain deals need to be re-evaluated.
“There is a carrot and club in what we do in the negotiations,” he says. “I don’t believe in saying to a hardware or software company, ‘If you don’t do X, then we are going to club you out of here.'”
The carrot version of that is communicating that failure to renegotiate will make it very hard for our company to continue our relationship with you as our vendor.
VPS came on the scene about six months ago. Robbins estimates the company has helped more than 30 organizations reduce their infrastructure costs by renegotiating existing maintenance and software subscription contracts. From that group, there are six shops that have IBM AS/400, iSeries, System i, or Power Systems i boxes. Robbins claims an average savings of 14 to 16 percent on renegotiated hardware maintenance contracts for these customers. Reductions in software subscription contracts are subject to wider variances, but in his opinion software costs are higher in AS/400 environments than any other, making renegotiations well worth the pursuit.
The world’s largest companies have staff that renegotiate contracts. They have been trained in negotiations and they work closely with their vendors. VPS fills this role for companies that operate without this type of personnel. And, Robbins says, “If we don’t save our customers money, we don’t get paid.” In other words, the fee VPS charges is based on a percentage of the savings realized by the renegotiated contract.
Companies typically have a couple of concerns when it comes to renegotiating contracts. One is the suspicion that unexpected fees will be applied to the back end of the deal. Robbins says the VPS contract guards against that.
The other concern is that companies often really like the salespeople they work with. They have a long-standing relationship with the person and don’t want a renegotiation to sour a good working relationship.
“I bank on customers being satisfied with the first renegotiation and wanting another,” Robbins says. “If we save our customers money and they feel that somehow their vendor relationship has been soured as a result, we still don’t get paid. It’s up to the customer to decide that.”