Negotiating Insights

It’s basic human nature: people are typically driven to do what rewards them the most.  This could mean giving back to the community or contributing to the betterment of the human race.

For a business to achieve its goals, incenting employees and vendors correctly is critical.  Employees’ and vendors’ goals of success must be in alignment with that of your business’s objectives.  If aligned correctly, your employees and vendors will do what is best for themselves, and in doing so, your company will thrive.

The question is then, how to best align the goals of your vendors with that of your profitability goals? When engaging a consulting firm to help improve your company’s profitability, it is vital to understand what their own business drivers are.

There are many ways for consulting companies to bill their clients:

Although it can be difficult to forecast what you may pay a company with a success fee model, the trade off is better results. Paying your consultants success fees are the only way to truly align your company’s business objectives with those of your vendors.  Since the time, investment and effort risk is primarily in the hands of the consultant, not many will charge in this manner.  Even fewer companies will only charge clients after the benefit has been realized by their clients.  Many charge based on an estimate of savings upfront.

Optelcon is one of the few consulting companies that charges a success fee after the benefit has been received.  Optelcon takes the risks because we are confident in our ability to deliver added profits.  Your company’s real benifits are:

• A vendor that is a profit center
• A cashflow positive fee structure (fees are charged only after clients receive benefit)
• Converts other vendors’ spend directly into increased profits
• For $3 dollars added to profits only $1 is charged
• Requires minimal internal effort
• Increases Productivity
• Improves Vendor Relationships
• Requires no systems to implement

If working with a company that provides these benefits is something that interests you, please contact us today for a complimentary review of your IT spend.

IS YOUR ENTERPRISE PAYING MICROSOFT MORE THAN NECESSARY?

In any dynamic organization, license consumption, new products, new releases, cloud solutions and IT infrastructure rapidly changes.  In the “old days” (more than 5 years ago), Microsoft did not have many true (Credible Threats) to applications like Windows, Outlook and Office; to name a few.  Without any real competition, Microsoft considered their customers, “Captive” and thus had little incentive to negotiate.

Fast Forward.  In the last 5 years there has been an explosion of cloud based platforms from big and small software providers.  Never before has the number of licensing and vendor options changed so dramatically.  For the first time, there are now real credible options (Threats) to almost Microsoft’s entire product line for almost every size company.

CONTROL

In order make sure their customer’s stay captive in the face of such threats, Microsoft wants to make themselves irreplaceable. The more interwoven they are into the very fabric of a company’s DNA, the more disruptive a vendor or technology change would be.  This creates control.  Example:  Say you’re a CIO of global enterprise with 20,000 employees all running Outlook, Office and Windows, CRM, Server, MySQL, Azure and other key business apps.  6 months before your renewal, Microsoft raises their pricing by 40%.  What do you do?  You pay it. At this point, you have no other choice.  You don’t have to be a mega company either.  Smaller companies find themselves in the same conundrum; albeit on a different scale.  In short, the more Microsoft products you embed into your business, the less likely they are to negotiate the best prices and terms.

RELEASE CYCLES

To add to the challenges of negotiating the best pricing with Microsoft is their constantly changing products from their licensing bundles and revising usage terms.  The fact is, few companies are perfectly aligned with Microsoft’s release cycles; it’s well-known that most tend to lag a cycle or two behind. Microsoft’s pricing structures can be complex and opaque. Some list prices (Microsoft calls them “ERP” – Estimated Retail Price) are published. It’s possible to get competitive reseller quotes for volume licensing programs such as Open and Select Plus, but Microsoft does not publish pricing for the direct-with-Microsoft agreements such as Enterprise License Agreements (ELA).  Unless you work with a company that regularly evaluates Enterprise agreements and custom pricing, it is unlikely you would know whether you’re getting the best terms.

MORE IS NOT ALWAYS LESS

It seems perfectly logical to think that if you put all your eggs with Microsoft that you will get a bigger discount and a better per unit price.  In negotiating with Microsoft total spend is important, but control can be as important.  We have negotiated Microsoft license agreements with a large number of companies ranging from Global Fortune 500 companies to companies with only $50-$100M in revenues.  Because we see it all, we have a unique perspective on real market pricing and how things really work.  Although contrary to popular belief, companies who are less reliant on Microsoft products tend to pay less per unit than those who are most heavily invested in the Microsoft technology stack. One way to improve your negotiating position is to diversify some of your software platforms.  Having all your eggs in the Microsoft technology stack, means you’re likely to pay more per unit in the long run.  Provided the solutions fit your needs, it is generally better to have 3-4 more easily replaceable vendors than 1 vendor who already has all your business and knows you’re not going anywhere.  In this scenario, the negotiating advantage moves from Vendor to Customer.

BUY ONLY WHAT YOU NEED

Microsoft is notorious for including everything AND the kitchen sink into their deals. The number of SKUs found in an agreement can be overwhelming.  Does everyone really need every application?  Why pay for every application for every employee if they only use Outlook, Excel and Word.  Understanding the needs of the business is important in negotiating deal.  We recommend negotiating the best price for all the services and bundles and get detailed cost per SKU figures. Having a good software asset management system prior to negotiations can offer you the detail you need to right size your next ELA.  Once established, remove the SKUs you do not need and create additional savings.  These license agreement are complex. If you don’t know how all this works, get outside help from a company that does.

 ESTABLISH CONTROL

If you are going to start negotiations with Microsoft or a VAR, you need be prepared. To start off, Microsoft has a huge chip on their shoulder.  They still have the mentality that all of their customers are captive and thus are not inclined to do anything off book.  The most important fundamental strategy in negotiating with Microsoft is to change their perception that you are captive.  You need to do your homework first. You should know and be ready to discuss who their key competitors are, pricing models, how the competition is better, faster, cheaper.  You should know, how long it would take to transition to a competitor and a high level transition plan.  Without violating any Non-Disclosure Agreements, you should have  detailed comparative cost models, showing how much vendor A, B & C will save your company  and offer a better solution. The more detailed the better.  These data points and models are invaluable in negotiations.  The fear of lost business is the most powerful way to negotiate special discounts not offered to other companies.  More so than with most companies, Microsoft needs to be convinced that they are replaceable.  Once established, you will find that Microsoft will be more accommodating in providing special custom pricing.

NEGOTIATIONS

After negotiating over $116M in Microsoft ELAs, and saving clients over $54M, we feel comfortable saying that we are experts on this topic. There is no simple formula to negotiating the best price and the best agreements.  Each company has different needs, levels of Microsoft integration and other variables that all need to be analyzed to create a winning strategy.   Although I will not go into the more technical aspects of all the different Microsoft licensing options in this blog post, I hope you gained some insight.

We highly recommend getting outside expertise from a company that has done this repeatedly and can help your company avoid the landmines and structure the most advantageous and cost-effective agreements.   

 If you would like to discuss renewal strategies, or find out if you’re paying too much to Microsoft or any other software, hardware, telecom or mobile services vendors,

A detailed Review of Interval, Attainment and Term Revenue Commitments

After negotiating hundreds of contracts, from dozens of carriers, for clients ranging from global 50 to $50M/year in revenue, I feel I have a unique perspective on this topic.  In my experience, I have found that revenue commitments, are to a large extent, arbitrary.  Although contrary to popular belief, I regularly find that companies who spend $1M/year will get better rates than companies who spends $10M/year with that same vendor. (I will explain why and how to avoid this phenomenon in another post).

Revenue Commitments Are Designed To:

• Generate predictable revenue streams for carriers
• Insure that the clients are captive customers
• Defend current revenues from would be competitors
• Create significant negotiating advantages at contract renewals
• Increase margins over time

• MARC – Minimum Annual Revenue Commitment
• Take Or Pay – Either Use A Minimum Amount Or Pay For It Anyway.
• MMRC – Minimum Monthly Revenue Commitment
• MAC – Minimum Annual Commitment
• ARC – Annual Revenue Commitment

The table below demonstrates the one of the most negative aspects of an annual commitment.

In this case, the customer has already spent more than the aggregate committed dollar amount by month 21. Since the customer still has the 3rd year commit to satisfy, the customer is stuck for the duration.  During year 3, the customer will still have to give the carrier an additional $720K to satisfy the 3rd year annual commitment.  In effect, the real commitment ends up being $3.12M. ($2.4M for years 1 and 2 + $720k for year 3)  Unfortunately, most of the agreements we see before renegotiating have a 30-60 day auto-renewal clause. By the time your company has satisfied the commitment, there is only 2-3 months left to do anything about it. Since the incumbent knows it can take 4-6 months to move a large data network to another carrier, the customer no longer has any leverage in the form of a credible alternative.  Advantage: (Vendor)

In this example, the 60% revenue commitments remains the same however, we have removed the annual minimum requirement.

By taking this approach, the customer satisfies the total $2.1M commitment in month 22 of 36.  This means that the customer no longer has any obligation to the carrier, but the carrier is obligated to keep the current rates and terms in place for the next 14 months.   The customer is in complete control at this point.  Figuratively speaking, the Sword of Damocles is transferred from over the head of the customer to that of the carrier.  Negotiating from a position of complete control enables our clients to get better SLAs, terms and pricing than companies with a less favorable negotiating position.  Advantage: (Customer)