Navigating IT Contracts

The recession made purchasing consumer electronics pretty straightforward, with deals, deals and more deals in every category. When it comes to corporate IT, the path to saving money is not as clear and often runs through the CFO’s office.

Discounting and renegotiating contracts is all the rage, and companies are demanding and getting better terms during tough times, with the promise they’ll keep a vendor on board for the long term.

At the same time, IT vendors are seeking to make up for last year’s lost revenue by aggressively going after larger, more expensive projects, says Jon Winsett, CEO of NPI Financial, an Atlanta spend-management consultant with clients such as CVS, Barnes & Noble and Boeing. "The new up is (staying) even," Winsett says.

To that end, more vendors are offering “try before you buy” options, allowing companies to install and test a product or service for a time before asking for payment, which can reduce risk.

Meanwhile, corporate IT departments continue to rein in costs by avoiding some purchases to get the most out of existing equipment, even though keeping the old stuff increases the likelihood they’ll have to make investments to retain its value, according to IT contract specialist Jeffrey Gordon.

In such a complex environment, CFOs can play a pivotal part in helping a company get the most value out of IT contracts. For one, they can use their finance and accounting backgrounds to help CIOs break a deal down into parts for evaluation, pricing, and later, measurement. CFOs are also adept at reviewing deals from a cost-versus-benefit perspective and can look at a contract against the broader view of the company’s overarching goals, says Gordon, a Raleigh, North Carolina, consultant to IT and telecom departments of companies with 50 to 500 employees.

Despite the advantages, the practice isn’t mainstream. According to Gordon, only half his clients have CFOs get involved on IT contracts. He always recommends it, “if for no other reason (than) to help drive the financial review process," says Gordon, author of a book on negotiating software licenses.

Here are a few key areas finance executives should consider when partnering with their IT departments on contract evaluations, negotiations, and approvals.

The Basics
Before pushing out an RFP, senior execs including the CFO and CIO should agree on the driving business need behind a purchase. Next, review budgets and spending based on a cost-structure approach that considers fixed and variable costs, as in manufacturing, according to Brian Barnier of ValueBridge Advisors, a Norwalk, Connecticut, firm that helps companies maximize IT investments. While aligning IT and business has been in vogue for years, Barnier insists the cost structure piece is newer: "IT is still being looked at as a support area.”

Next, understand IT contract basics, says Faruq Hunter, former CIO of a Chinese apparel company and VP of international strategies and operations for Genius Consulting in Atlanta. Projects should have a clear beginning and end defined in a statement of work (SOW), and ongoing contracts should have performance requirements defined in a service-level agreement (SLA). If the work incorporates both project and maintenance or support services, it's best to have separate contracts that reflect the differing goals and terms, Hunter says. To help track objectives and expenses, he also recommends assigning a number to every task included in a contract that corresponds to a similarly numbered item on the invoice.

Negotiation and Strategy
There are a few rules of thumb when it comes to negotiation. Your relationship with vendors is an important asset, and trust works both ways, so understand a vendor’s motivations and don’t just focus your own bottom line. Winsett, who previously worked as a sales VP for a public software company, says vendors aren’t bad guys. “They want to maximize price. That’s just the vendor business model. Don’t beat up vendors, but start with data and understand what is a fair price.”

It’s also critical to have someone inside or outside the company monitoring news and trends in the IT marketplace, so you know the best time to buy certain technologies or how to work with particular vendors, Winsett says. "Things are changing constantly. For instance, SAP last year had 36 pricing changes and 18 compensation plan changes for its salespeople.”

Next, stay on guard: “Negotiation begins at hello,” Winsett says. To understand the selling situation, vendors will listen to every inflection in your voice, your tone and everything you say. Even a casual lunch is a prime opportunity for a vendor to glean useful insights about you and your "buying personality," he warns. "Some salespeople do psychological profiles of prospects."

Gordon, the IT contract consultant, has one firm, yet wise rule about disclosures: “Never tell a vendor your budget." If you do – surprise, surprise – the quote will likely come in at exactly the same number.

Another age-old IT tenet is to buy strategically. Avoid the temptation of vendor promotions. Stick to purchases that deliver competitive value based on current, not anticipated needs, Gordon advises. For instance, the latest upgrade deal for Office 2007 may seem fiscally wise, but don't do it if Office 2003 is still working just fine for most of your employees.

Also, squeeze more value from existing contracts. Take inventory of all IT assets and needs across the company, so you can aggregate purchases from a single vendor to save money, Winsett says.

Winsett also suggests working with your CIO to categorize and score vendors across three technology categories: strategic, core, and discretionary. Look at the company’s activities and spending across those vendors to see where you can leverage relationships for a better deal. If you have a pricey support contract with a non-core vendor that’s rarely used, ask the vendor to reduce the price accordingly. If they don't, take your business elsewhere.

Protect Thyself
To reduce contracts’ risk and increase their value, experts advise measuring them in few areas very well. Service-level agreements are a common method, but according to Barnier, they can be too soft or IT-oriented. He suggests CFOs, CIOs, and department heads work together to determine service-level agreements, expectations, and other metrics for success. Then establish both carrots and sticks for vendors based on SLA performance.

Because more companies are outsourcing IT functions to third parties, CFOs should understand benefits and liabilities of such relationships to better guide their CIOs. "Outsourcing storage is easy," Barnier notes. "But outsourcing applications you depend on for your core business can be a big deal, because if a competitor changes course you can't always change as quickly in response” he says.

Finally, hold IT vendors accountable, says Hunter, with Genius Consulting. “If you have gone down the road with them, following their advice, you should never accept a bill for an unexpected occurrence.”

Originally published on Inside Edge, June 1, 2010.