When the COVID-19 pandemic gripped the world in mid-March, many executives saw an immediate hit to their businesses, including top line revenues and profits.
The International Monetary Fund is projecting a 4.9 percent contraction in global GDP in 2020. Meanwhile, unemployment rates in the U.S. jumped from 3.7 percent in 2019 to 10.4 percent this year, also according to the IMF.
As the business impact of the pandemic varies widely between industries, many CIOs and technology executives find themselves under pressure to cut costs. HMG Strategy recently connected with Joe Galuszka, Principal at Fulcrum Associates, regarding his insights on negotiation scenarios for CIOs and enterprise technology buyers with Cloud and SaaS providers.
Here are the sequence of events and negotiation recommendations that Galuszka shared for each setting:
Annual Renewal Payments:
Delayed payments – delay payments by 30-to-90 days after the payment is due
Reduced payments – negotiate a reduction in annual payment based on company’s corresponding decrease in revenue (e.g. 25%)
No payment for 3 months – while business is operating at lower capacity and revenue generation, then extend the contract by 3 months at the end of the term
Contract Renewal Negotiation – at end of 3-year term:
Negotiate cost reduction (10% – 25%+) due to lower revenues and decreased usage (business value)
Negotiate lower costs due to employee layoffs/reduction in force (RIF) decreased headcount, which decreases the number of required licenses and reduces the cost of renewal
Negotiate lower costs due to ‘not active’ licenses or low utilization (logins only) licenses which are not required and can be deducted from the total license count, thereby reducing cost
Change the type of license being contracted from more expensive ‘Premium’ user types to lower cost license types which reduces cost
One ‘Gotcha’ – In many cases, these types of license changes need to be made at end of the term and cannot (or will not) be negotiated by the vendor mid-term
Early Contract Renewal Negotiation – During Year 2 of 3-year Contract Term:
Customer negotiates lower payments based on reducing license count due to lower headcount or low utilization rates
Contract pricing is determined to be ‘above’ market-competitive pricing by negotiating lower pricing, resulting in cost savings
The benefit to the vendor is that the contract term can be extended another 3 years or possible even 5 years (if it’s a screaming deal) so a bird in the hand is better than two in the bush
Do Not Pay – Annual Price Increases – which are typically negotiated into the contract agreement
Remove, Eliminate – Annual Price Increases from contract agreement
Reduce Software Support – Maintenance Fees – typically 18% – 22%
Use a Software Asset Management (SAM) solution to determine which licenses can be dropped from support, thereby reducing costs
“Freemium” Software Solutions:
Many vendors have developed C-19 solutions for their companies to manage the C-19 pandemic and safely return to offices
Workday is in partnership with Salesforce to help customers prepare and protect the workplace; Qualtrics has create a Return to Work Pulse; PwC offers a Contact Tracing product
Many of these solutions are being offered “For Free” for 30-to-90-day trials… but then it’s time to ‘Pay the Piper’
Either leverage your existing customer pricing discounts or pre-negotiate what your proposal will be at the end of free term to achieve market-competitive pricing
Project Delivery – Implementation Projects:
Most aggressive cost-savings: Projects can be cancelled or shut down
Can include reduced delivery or delayed delivery by reducing project headcount and pushing back delivery dates to lower costs and delay payments
Negotiate lower service levels, thereby reducing costs
Counter-Intuitive Thinking – Spend Money to Make Money
Launch a business transformation project which improves operational efficiency or improves the company’s ability to generate revenueTo learn more about Joe Galuszka and the 2020 HMG Live! Silicon Valley Global Innovation Summit, click here.
