Negotiate with Confidence

Most CIOs will admit they aren't financial wizards; their job is to use technology to drive the business forward, not figure out how much to pay for it. With this in mind, maintenance is a trap waiting to happen. Companies invest considerable energy negotiating licensing fees and implementation costs, and are then too exhausted to argue over maintenance. As a result they relent to things they should not. "These are things that [vendors] do that are standard and legal," says AMR senior research analyst Monica Barron. But if you are aware of the vendor perspective, you can avoid some of the common pitfalls that can swallow you during contract negotiations.

When entering a negotiation, simply be prepared to ask for things. In fact, most of the tips we've gathered from various CIOs hail from the you-never-know-til-you-ask-for-it school. For starters, the maintenance percentage should apply to the negotiated rate of the software - not the retail rate. Vendors may try to peg the rate as a percentage of the current list price. Most of the CIOs interviewed for this article, however, say they are paying a percentage of the discounted rate, which can be substantially lower - 40 percent in some cases.

Second, make sure to lock in the rate for the length of the contract. Many times vendors will agree to a rate for the first or second year, only to shoot it up thereafter. To ensure this doesn't happen to Dow Corning, CIO Abbe Mulders insists on the same fixed rate for three to five years. Plus she includes language in her contract that limits how much the fee can increase. AMR's Barron suggests linking the increase to a standard economic indicator like the consumer price index or the prime interest rate. Perhaps the best way for a CIO to set up a good maintenance contract is to admit that he is not a professional negotiator and hire someone who is. "The software companies make the contracts so complicated specifically to put you at a disadvantage," says Luc Lafontan, director of information security at publishing company Primedia. "[They] aren't going to guide you through it." Lafontan hired Miro Consulting to negotiate its contract with Oracle. Some of the tricks the consultancy employed include combining used and unused software licenses to get the best rate and waiting until the end of the vendor's quarter - when the vendor is anxious to close any deal and scoop up every dollar it can - to improve Primedia's negotiating leverage.

Lastly, the most important element CIOs can bring to a negotiation is patience. Before choosing a vendor - or even during a long negotiation - a CIO always has the option of walking away and hiring another vendor that will agree to his terms. Vendors may resist many of the requests initially, says D. Beatty D'Alessandro, but you can wait them out. In 2001, D'Alessandro, vice president and CIO for electrical products maker Graybar Electric, spent more than three months in contract negotiations before agreeing to terms with SAP. He says he was willing to wait as long as it took to get satisfactory terms. That experience, he says, reinforced his guiding assumption: Everything is negotiable.

Throw Your Weight Around

Once a company has spent millions of dollars on licensing and implementation with a particular vendor, it's hooked. And vendors know it. But that doesn't mean a CIO has no options when it comes time to renegotiate. Primedia, for example, conducts monthly software audits and quarterly reviews with business units to find out how many licenses it has for any given piece of software and how many it actually needs - oftentimes revealing different numbers. This information lets Lafontan determine just how much maintenance he requires.