Show me a company that thinks it got a good deal when it negotiated a big discount off the list price for an enterprise software package, and I will show you a company that likely just got rolled.
“No one pays list price for software anymore,” Gartner research director Jane Disbrow told CRM Buyer Magazine. Vendors routinely inflate their list prices in order to give themselves negotiating room. A vendor may give in on a discount “because it knows it can do some revenue mining down the road … that there are a lot of clauses that allow them to charge extra money.”
In recent months, software vendors have increased the already mind-boggling complexity of dealmaking by introducing new pricing models that many buyers are finding confusing.
In short, negotiating a fair price for enterprise software has never been easy, and now there are a number of new factors to take into account. The upshot? Some companies may be better off outsourcing the bulk of the price negotiation process to professionals instead of relying on their own in-house expertise.
Play the Game
“You have to know what the standard discount is and then start negotiations from that point,” Disbrow said. “You have to know which are the clauses that can cost you. That is how the game is played.” The key is current market information.
“There is a move away from traditional per-seat pricing to role-based, value-based or site license pricing,” Meta Group senior CRM program director Steven Bonadio told CRM Buyer. “At the same time, many vendors have begun repackaging applications to reflect different concepts to incent the buyer to buy more that way,” he added.
The Pricing Tango
Then there is the negotiation process itself, which can be particularly cutthroat. Disbrow tells of companies that stop evaluating other vendors, thinking a deal can be reached with a particular company. At that point, they lose their leverage with the vendor. “That’s a common mistake,” she said.
Plenty of uncommon mistakes can occur, too. “Software negotiation is a specialty skill,” said Disbrow. Besides understanding the requirements of the buying company, negotiators must have a general understanding of the particular technology and be trained in contract and negotiation skills, she explained. They must have thefinancial skills to evaluate pricing models from an investment perspective and to analyze the total costs of licenses and maintenance in the long term.
All are good reasons to outsource. Yet Disbrow estimates that only about 5 percent of companies that purchase enterprise software use professional negotiators. That number rises to 15 percent after taking into account the companies that consult professionals for current market information.
The Cost of Saving Money
Of course, not every company needs to spend more money to save money. A lot of companies, especially the larger ones, have established specific procurement personnel for IT and software. In fact, such companies handle their IT procurement very well, Disbrow said, and usually go to outside sources just for current market information.
Then there are the costs involved. For smaller companies, the tab for such expertise can quickly become burdensome, at the going rate of US$100 to $350 per hour. Add to that the challenge of finding the right expert for the job. “Choosing the wrong negotiator can easily happen,” Disbrow conceded.
Providers of this type of service range from individuals or small groups of three or four people who have accumulated clients over the years, to consulting firms, to legal firms that specialize in drafting and analyzing tech contracts. International Computer Negotiations is one of the largest firms that offers these services, Disbrow said.
Bring In the Big Guns
Some start negotiations for a buyer from scratch – from the RFQ (request for quote) to implementation phase. Others will take a price that a company has negotiated, but not yet committed to, and try to squeeze more savings out of the vendor. These consultants are paid a percentage of the savings they negotiated.
Some negotiators focus just on setting terms and conditions, and identifying potential risks for buyers. Others negotiate strictly on price savings. Both are important, though Disbrow noted that even the more experienced companies tend to overlook some risks.
Back to School
“One thing I recommend for any organization is to have in-house staff take a few courses in negotiations from the American Management Association. That way, they can get a feel for the industry and what is involved,” Disbrow said.
Companies that have a limited budget may want to consider using a negotiator just to give the terms and conditions clause a look, she continued. “It’s where companies tend to lose the most amount of money. These will be with you long after you have paid the initial license fee.”