How to make the most of an IT buyer's market

After years of fighting tooth and nail with vendors for meager price discounts or modest service-level agreements, IT has seen the tables start to turn: Sweeping changes are reshaping the vendor landscape, shifting negotiating power from stingy service providers to savvy CIOs.

At the center of this sea change are trends such as cloud computing, social media, data analytics, remote monitoring, automation and mobility. Whether it's manufacturers opening sensor-operated plants or healthcare providers using remote patient-monitoring systems, organizations are acting fast to seize new opportunities and satisfy customer demands. And as the need for agility increases, cloud-based computing is booming: Infrastructure as a service and business process as a service are the two fastest-growing segments of the IT services market, expanding 44.9% and 12.4%, respectively, in 2014, according to Gartner.

Just ask William Graff, senior vice president at Cerner Technology Services. "We're spending a lot of time with specific internal business units looking at cloud solutions that traditionally we would have hosted on our own data center. But because of business pressures to move rapidly, we've selected a handful of cloud providers over the last year," he says.

Decisions like that at companies of all kinds are adding an infusion of new, agile cloud providers into the average company's mix of more traditional vendors.

Combined with the need for speed is an increased awareness of high-tech products and services. "The buyer's paradigm has changed dramatically over the last several years," says Keith Lubner, CEO and a managing partner at Channel Consulting, a Philadelphia-based management consulting firm specializing in vendor relations. "Access to information and content is so dramatic that buyers are more astute than ever before. They have instant access to information on every single product out there -- they've flipped the whole sales cycle on its head."

Armed with information and eager to take advantage of fast-acting cloud, analytics and mobile technologies, CIOs are voting with their wallets: A staggering two-thirds of respondents to a recent Gartner CIO survey said they expect to change primary suppliers by 2017.

Desperate to stay on top, traditional IT vendors are responding by tossing out their typical IT sales models to offer flexible subscription services, shorter sales cycles, unprecedented product innovation and personalized service. And that's creating a once-in-a-career opportunity for savvy CIOs: a chance to negotiate huge price cuts, packaged deals, favorable contracts and unique partnerships with big-time vendors once too busy to return calls.

Tough Customers

Jim Forbes is a perfect example of the type of technology executive that's keeping vendors up at night. The CTO at University Health Network (UHN) in Toronto, Forbes had for years relied on standard criteria such as "functional requirements and server compatibility" to select technology solutions. But a desire for a more scalable cloud-based tool recently convinced him that it was time to switch IT management vendors.

"Our new thinking sent us in a very different direction," says Forbes. "We ended up going with an entirely different vendor -- one who really wasn't on our radar. There was some nervousness, but we recognized that this was the right strategic move, and looking back, it was a very good choice."

James Cole, CIO at First National Bank of Omaha, also has a set of purchasing priorities that could cause vendors to panic. Once susceptible to industry buzz and product hype, Cole says he now finds himself taking a more business-oriented approach to vendor selection by asking, "Where does a solution fit into my organization?"

Today, IT staffers meet with the retail bank's business-line leaders five days a week "to understand what their needs are and bring IT solutions to them," Cole says. "We're becoming more in tune with our core business, helping our business-line leaders with their needs and then going out into the market and determining who best can solve that need."

But shifting the focus from acquiring tech tools to discovering business solutions is also changing the nature of the CIO-vendor relationship -- to the CIO's advantage. Increasingly, vendors are being asked to be a partner rather than simply a provider.

Cole points to the First National Bank of Omaha's four-year relationship with Client Resources Inc. (CRI), an IT talent and solutions provider. Once considered a supplier of temporary labor, the midsize vendor has evolved into a key collaborator with the bank's IT department, Cole says. For example, CRI recently worked hand in hand with the bank to design and develop a mobile app. "It became this great partnership," says Cole. "If you were in a room with us, you'd have a hard time knowing who was the First National employee and who was with CRI."

Even tech vendor titans are shedding their hands-off reputation for a hand-holding approach that they hope will help them retain customers. Seven years ago, Cole says, the bank's dealings with Oracle could have been described as "a catalog relationship" involving occasional database orders. Today, a senior executive from Oracle is dedicated to helping First National Bank of Omaha with some seemingly minor IT projects, such as developing a better login process for mobile employees. "It's very much a collaboration," says Cole. "Oracle is looking at their business model differently now and seeing customers as a relationship rather than a product sale. It's just interesting that Oracle is listening to us."

Power Shift

In fact, whereas power-wielding IT vendors once shaped CIOs' buying behavior, CIOs are now having a profound impact on the way a vendor approaches everything from customer service to product development. Says Graff: "When we enter into a long-term agreement with a vendor, we expect that our voice as an end-user community will be heard and that we'll influence changes and enhancements to a product."

IT Survival Guide

How to Negotiate With Vendors

Once you sort through the chaos, it's easier than you think to take advantage of the changing nature of the IT-vendor dynamics. Here's what you can do:

If a vendor won't budge on price, ask to have additional products or services thrown in for a more cost-effective package deal.

If you're working with a new vendor, test the waters by taking advantage of a monthly subscription service.

Always ask a vendor what migration path it has in place for your business in case it's involved in a merger or acquisition.

Create a five-year plan that limits a vendor's ability to raise its prices.

Request a single point of contact for all customer service.

Investigate any legal liabilities that might arise from using a certain product, such as questions regarding intellectual property rights.

Hire a third-party consultant to provide industry benchmarks on fair market prices for products and services.

When hammering out cloud deals, be sure the terms of service-level agreements cover specifics such as network uptime.

Cindy Waxer

But as CIOs and vendors increasingly become bedfellows, the IT world is drafting its own version of a prenup. For instance, when UHN began vetting vendors for a new managed service contract, Forbes insisted that each interested party develop a five-year plan illustrating how unit costs might change over time. Vendors that promised cost-per-unit decreases earned extra points.

Another way Forbes gained an upper hand in negotiations was paying research firms, including Gartner and PricewaterhouseCoopers, for market analysis on IT service prices such as help desk costs and server fees -- industry benchmarks that provided "a viable opportunity to negotiate cost reductions right upfront before signing a contract," he says. "We're doing more strategic thinking as part of the RFP process as opposed to just writing an RFP and throwing it out onto the street."

Such an informed approach to negotiating pays dividends, according to Cole, who says he once talked an IT vendor into reducing the price of a system by $3 million. "We build performance milestones into all of our contracts," he says. "We also do a very good job of negotiating [financial] holdbacks so that we don't feel like we're paying for a service well before it's delivered."

Faced with dwindling bargaining power and better-educated customers, many vendors are sweetening the pot by offering cost-effective bundles of services. For example, a vendor specializing in email encryption technology might try to package its tool with an Exchange server and high-margin services such as consulting on compliance issues.

In fact, Lubner says peddling packages is "the only way for vendors to differentiate themselves and provide more value to the buyer" these days.

Forbes agrees. Just as the federal government has been slowly embracing a shared services strategy, he says, the healthcare industry is inching toward a similar model, where multiple hospitals, clinics and laboratories will agree to share the funding and resourcing of key IT services to cut costs and improve efficiency. "There's a lot of opportunity to save money and reinvest the subsequent savings back into healthcare if we only shared some of these IT services," says Forbes, adding that the vendors that are most likely to come out ahead are those that "recognize the market is shifting and respond by packaging their software."

Sharing the Legal Load

But greater collaboration, bundled IT services and high performance standards aren't the only changes in the IT landscape helping to create a buyer's market. Organizations are demanding that even legal issues be treated as shared responsibilities rather than matters to be hashed out by bloated legal departments. After all, says Cole, "if you just have two sets of legal teams talking, you'll reach an impasse very quickly."

Cole should know. In the first four months of this year alone, he's had to tackle questions of intellectual property with at least three different vendors. That's because, in these litigious times, it's becoming increasingly common for unwitting end users to wind up entangled in patent infringement suits. For example, a hotel chain that offers its guests free Wi-Fi might find itself involved in a patent suit simply because it relies on server technology that has come under legal fire.

However, whereas in the past vendors would simply scoff at the notion of shared liability, Cole says there's more willingness now to address issues such as intellectual property as a mutual business challenge rather than as a legal technicality.

"We need to have protection so now it's a negotiation to determine how much liability a vendor is willing to give up and how much risk am I willing to accept," says Cole. "It's become a business discussion, not a legal discussion. In fact, it's a very common conversation in the IT community today."

That's not to suggest, however, that vendors are simply rolling over and letting customers call all the shots. For example, Graff points out that Kansas City, Mo.-based Cerner is both a buyer and a provider of IT services and says that, no matter how profitable a project might seem, the company will "never sign a deal [as a provider] where we can't deliver on what we've written into the contract."

But that's not all. Cole says most organizations do recognize and respect a vendor's need to turn a profit. "Recently we negotiated a deal where it came down to both sides saying, 'Here's what I'm willing to give you in terms of profit and here's where I need to be in terms of expenses,'" he recalls. "That's a partnership where we shook hands. But had we dug in our heels and said, 'Here's all I'm going to give you,' we both would have left with a bad taste in our mouth."

After all, there's no telling when the pendulum will swing back to a seller's market. All the more reason, says Graff, for savvy CIOs to make sure "it's a win-win situation for both parties."

This story, "How to make the most of an IT buyer's market" was originally published by Computerworld.

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