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Negotiating a contract renewal? Start early to derive maximum value

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A contract renewal with a major vendor is always a key milestone for any procurement or ITAM professional as it provides the opportunity to showcase your true worth to your employer. Getting this process right is critical as the agreed terms will dictate the organization’s usage and costs for many years to come. Getting it wrong could have long-term ramifications to the way a company operates and innovates, as well as to its balance sheet.

To achieve the best possible outcome, our advice is to start preparing six to twelve months before the relevant renewal dates, with the amount of runway varying according to the size and complexity of the company’s software and cloud deployments. This may seem like a long lead time but early preparation is important if you want to extract maximum value from these negotiations.

Renewals are a two-stage process

Renewals take this long because they involve a two-stage process, the first of which can be time consuming to undertake, at least when tackled comprehensively. Indeed, it’s this first step that organizations sometimes overlook or try to condense into a shorter period.

This is the Optimization phase, when an organization must ascertain exactly which software and services have been licensed and deployed, which are actually being used, and work out what new services will be required over the next three to five years. The outcome of this phase should be a ‘Bill of Materials’ that sets out the organization’s exact (or near-exact) requirements across the duration of the new contract term.

Drawing up an optimized Bill of Materials is by no means a quick process, but it’s important not to cut corners. Not only do you need to undertake a comprehensive analysis of the entire estate, you must also estimate what future demand will look like. IT teams and different Lines of Business are all likely to have their own lists of ‘must-have’ solutions, which they will have compiled with little consideration of the cost and licensing implications of these purchases. It is ITAM and procurement’s role to explain these implications, asking some tough questions in order to get these stakeholders to justify their requirements.

There’s also the challenge of forecasting what services will be needed in three-, four- or even five-years’ time. Companies focused on M&A activity, which are on a rapid expansion path, or are planning a restructure may find it particularly challenging to predict what they need. To provide clarity, additional stakeholders from right across the business may have a role to play in building a new Bill of Materials, adding to the timescales.

The good news is the more time that’s invested in ensuring the accuracy of the Bill of Materials, the more leverage your organization will have during the second phase of the process: the negotiation. Indeed, at Livingstone, clients achieve an average of 38 percent savings as a direct result of engaging both phases.

Take time to understand the vendor’s position

Some organizations feel that, because they have managed a successful renewal with some impressive discounts in the past, they can use the same approach for future negotiations.

In reality, this ‘rinse and repeat’ approach rarely delivers maximum benefit as each vendor – and indeed, each engagement – is different. It is therefore important to factor in enough time to understand what particular buttons to press when you reach the negotiation stage.

For example, if your vendor is focused on growing its subscription business – and your roadmap is weighted towards cloud-based services – you are likely to have extra leverage. On the flipside, if you have already migrated much of your estate to the cloud – and this is your second or third generation cloud contract – you may need to look elsewhere to achieve value.

It is important to spend time understanding the vendor’s point of view, in particular, what services and product sets it is pushing at that moment in time and how its sales team is incentivized. Knowing the answers to these questions before you try to agree terms will place you in a far stronger position.

Independence reaps extra benefits

In addition to affording enough time to the renewal process, it is equally important to ensure that the experts you appoint are focused on maximizing benefit for your organization, not for their own.

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