IT shops renegotiate contracts to wring savings out of vendors

Saving money is paramount for CIOs in today's economy, and renegotiating vendor contracts may be one of the best ways to chop expenses.

Convincing vendors to lower prices when you have a signed contract is a difficult process, (see "Negotiating with IT vendors: Five tips for saving money") yet six out of 10 CIOs are trying just that, according to a September survey of 50 CIOs by the CIO Executive Board.

It may seem hard to believe a vendor would give up revenue willingly. "They can be fairly contentious discussions," AMR Research analyst David Brown says.

But it is a competitive market. "The leverage I have is that at some point, that contract is going to come to an end, and I'm going to be more likely to switch vendors when someone is not willing to be flexible," says Thomas Catalini, a member of the Society for Information Management (SIM) and vice president of technology at insurance brokerage William Gallagher Associates in Boston. The brokerage is trying to renegotiate about a dozen contracts with IT vendors including telecom, outsourcing and maintenance companies, Catalini says. Salespeople are under pressure to record sales in 2008, so there's also an opportunity to get larger-than-usual discounts if an enterprise is willing to buy a product earlier than it had planned, he says.

With a signed contract, a customer typically has to give up something to get a discount. This often means extending the contract in exchange for lowering the annual fees. Simonds International in Fitchburg, Mass., has achieved significant cost savings by renegotiating contracts with disaster-recovery, ERP, phone and WAN vendors, says CIO Susan Kifer.

Key in her negotiations is honesty, Kifer, who also is a SIM member, says. The cutting-tool manufacturer is struggling because of the declining housing market, a fact she is quick to point out to vendors. "Everyone understands what's going on in the housing market. We need to lower our costs in order to remain viable. For us, that's an honest statement," she says.

Simonds had a three-year contract for a robust high availability disaster recovery service that cost $60,000 a year. About a year ago, “the vendor worked with me to provide a backup service that was not [high availability] but was adequate and lowered our cost to $30,000 for the remaining two years of the contract,” Kifer says. The vendor was flexible in part because it also sells servers to Simonds and wants to maintain a strong relationship, she says. (Compare server products.)

Kifer also targeted ERP annual licensing, negotiating about a 10% discount in exchange for a three-year contract renewal. That was about two and a half years ago and she now is renegotiating again, she says.

With Simonds' phone and WAN vendor, Kifer renegotiated with about six months left on the contract. She went through a full RFP, competitive-bid process, which helped convince the existing vendor to lower pricing. "Not everybody's willing to [renegotiate]," she says. "We have found if we have a longstanding relationship [with a vendor] they have been willing to help us through."