Procurement departments often seek out “best practices” to help them achieve the most favorable outcome from their cloud renewal negotiations. Too often these good intentions backfire when there is too much reliance on past experiences and a belief that there is a one-size-fits-all approach that will yield optimal results.
Here are 7 of the most common negotiation tactics that often don’t work as intended or can even result in negative consequences if used during cloud renewals.
1. Waiting Too Long to Prepare
Many organizations begin their cloud renewal negotiation preparations around 3 months in advance of the renewal date, but this is not enough time to effectively negotiate, let alone discuss the litany of issues that will need to be addressed with the cloud vendor. Waiting this long will also significantly diminish your leverage since the cloud vendor will know you don’t have enough time. Ideally, organizations will begin preparations 12 months in advance of the renewal date.
2. Failing to Effectively Involve Executives
If someone from the procurement or vendor management department manages the cloud vendor relationship and their only contact is at the account representative level, your relationship is most likely not as strategic as it needs to be. It is imperative for senior IT and business executives to interact with the senior cloud vendor executives.
Cloud contract negotiations are not the same as ordering office supplies and thus require more senior-level attention and dialogue. Organizations are increasingly reliant on their cloud vendors, so these relationships should involve executives from both companies who approach and treat the relationship as a strategic partnership.
3. Leaning Too Heavily on Executive-level Relationships
While it is necessary to establish and maintain executive-level relationships, relying on them too much at the negotiation table is a mistake. Too many organizations overestimate the strength of the executive-level relationship and underestimate the cloud vendor’s negotiation abilities. Remember that cloud vendors can and will use the same relationship to their advantage.
Cloud vendor sales executives love when senior-level executives want to discuss strategy or ways to improve the relationship because this increases the likelihood for the much sought after upsell and a greater reliance on the vendor’s solutions. Don’t forget that the executives of large cloud vendors and those in senior sales roles are likely the best-of-the-best at selling. Executives at a company like Salesforce, that specializes in helping other companies sell more effectively, know how to persuade customers into making a purchase.
Even if there is a strong executive-level relationship in place that can be leveraged during renewal negotiations, it is still critical to develop a unified and effective set of talking points that set the proper expectations for the relationship.
4. Focusing on Price
When it comes to your cloud agreements and renewals, price is only one variable. Lasering in on price and cleaning up other factors later will never lead to an optimal result because even if the cloud vendor offers additional discounting or upfront price reductions, they will make up for that lost revenue at the next renewal (i.e., in 3 years).
If you fail to negotiate proper renewal term price protections because you were blinded by the upfront price reductions achieved and are then confronted with a significant (and most likely unbudgeted for) price increase, you’ll have two options: renew at the increased price or lose access to all the functionality your organization took time implementing and is now using productively. In most cases, switching cloud vendors is not feasible so the organization ends up being effectively forced to renew regardless of the price increase and will need to find money from other parts of the business, which usually involves making unexpected detrimental cuts.
Rather than focusing solely on upfront price reduction, organizations must also gain commitments from cloud vendors regarding downstream price protections and flexibility. Price should always be a key part of any cloud negotiation, but the negotiation should not end there. It is important to approach the negotiation in a more holistic manner.
5. Introducing Alternative Solutions
Unless there is a truly viable alternative solution, ample time to properly evaluate, and enough runway to make a switch, mentioning competing cloud vendors as part of your cloud renewal negotiation strategy will not be an effective use of your time. Simply saying you may switch if asks are not met is meaningless unless you are actually able to do what you say you will do.
There are several reasons switching to an alternative solution may not be truly viable, including:
- The organization is already locked-in with the current provider, relying on the cloud vendor’s solutions to drive revenue, increase productivity, and in some instances, help day-to-day business run effectively.
- There is a limited pool of alternative cloud products that can ultimately meet the organization’s requirements, easily integrate into the current technology ecosystem, and have business-side buy-in.
- Most alternative options were already evaluated and dismissed or moved away from in the past.
- Significant change management challenges and loss in productivity during the transition period could negate the potential benefits of switching.
Mentioning alternative options may work for the procurement department when ordering office supplies, but it is not the same for cloud products which you do not own. All incumbent cloud vendors are well aware of the huge hurdle migrating to a new solution is, so this procurement tactic is only effective and worthwhile if it is truly viable.
6. Being Too Shortsighted
Cloud deals typically come with 3-year terms, but your organization loses leverage each time you renew so you need to go into each renewal thinking about what your renewal (pricing, requirements, relationship, etc.) will look like much further out (i.e., 6-9 years down the road). Rather than looking at the short-term, think strategically about the relationship and where your organization is headed.
With digital transformations being at the forefront of most organization’s plans, it becomes even more important to approach your cloud renewal with a long-term mindset. How will the cloud vendor and the products they sell help transform your business digitally? You need to ensure the contract you put in place is structured in a way that provides the necessary long-term protections and flexibility to allow for an effective and complete transformation. Additionally, you must motivate the cloud vendor to think strategically about the go-forward relationship in the same manner you are.
7. Inconsistent Messaging
Failing to keep the cross-functional teams that interact with the cloud vendor aligned on goals results in inconsistent messaging being communicated to the cloud vendor. For example, someone from the procurement department suggests they may need to consider alternative cloud solutions if the negotiations don’t go well. Unfortunately, this occurs just a day after the CEO or line-of-business executive set up a meeting with a cloud vendor executive to discuss how their solution could help the organization meet its long-term goals. The procurement department not only loses credibility but the organization loses leverage while the cloud vendor gains that leverage. Everyone who has contact with the cloud vendor must be on the same page to effectively negotiate.
While many of these common negotiation tactics can be effective in certain situations, cloud renewal negotiations require a unique and well-crafted approach. Unfortunately, too many organizations are learning the hard way that negotiation and/or procurement best practices don’t often transfer over to cloud renewal negotiations or don’t lead to the optimal results organizations seek. Having the proper balance between utilizing these tactics and applying them properly in the context of your cloud renewal with cloud vendor-specific benchmarks is the key to a successful cloud renewal negotiation.