Precedents Matter in Cloud Negotiations

Negotiating with a SaaS cloud provider can be more unforgiving than you may think.  Since your initial transaction will create a precedent for future negotiations, it is critical to achieve a highly competitive deal construct from the beginning.  This construct will empower your organization to:

• Have pricing transparency and predictability
• Expand into other cloud solutions at highly competitive pricing
• Mitigate downstream risks and unexpected costs; and
• Derive the greatest value from your investment.

There is real disparity in the competitiveness of deals that a cloud provider will present to customers in terms of pricing and commercial terms.  Some organizations have difficulty securing highly competitive deals due to poor planning, lack of market knowledge, or limited leverage.  Whether you are a first-time buyer or moving toward a renewal – precedents matter.  It’s important to get it right the first time, but even if you do have some deficiencies in your initial deal, there’s still an opportunity to course correct when you are expanding your cloud footprint as part of a renewal.

Organizational Readiness Before Vendor Engagement

Organizational readiness is critical to ensure your team is prepared before beginning discussions with any cloud provider.  We recommend starting with the following foundational aspects:

• Business case – While you do not necessarily need a formal business case, you should at least identify your current state and desired future state. Where do you want to go and what challenges do you face in getting there?  This will include your business drivers or reasons for undertaking the initiative, your project goals, and how success will be measured.  The business case serves as a decision-making guidepost throughout the entire project, from vendor evaluation through managing the implementation.
• Stakeholder alignment – It is important to get all stakeholders aligned – not only with your business case but all aspects of readiness, including your negotiation strategy and approach. If you don’t, you cannot function as a cohesive team and the vendors will pick you apart in negotiations.
• Timeline –Here we look to identify drivers or restraints that might present time-sensitive restrictions to your process. This could be an upcoming board meeting or steering committee approvals with scheduled dates.  Perhaps you have a legacy system that must be replaced by a certain date due to discontinued support, or you have industry restrictions.  For example, retail companies will not schedule a go-live anytime between September through January because they cannot afford to disrupt the holiday season, their busiest time of year.  Once you have identified these long poles in the tent and your desired go-live date, start working backward to develop your timeline.
  • How long do you think the project will take to implement?
  • When do you need to start the project?
  • How long will it take to complete the sourcing process and negotiate contracts?

Given these parameters, you should be able to frame up a high-level timeline of sequenced activities.

• Budget – Certainly this is going to be a bit fluid as you get proposals back from all your vendors, but you should have a rough order of magnitude before you begin. This will help ground your team with respect to any limitations you may have and gain an understanding if you can get more budget in the future.  You certainly do not want to communicate this to the vendors, but it’s good to know your limitations and flexibility before you enter into any discussions.
• Approval process – You want to clearly identify your organization’s approval process and ensure that all approvers are aware of your initiative, timing, etc. Make sure to keep everyone informed regularly to avoid surprises.  For example, you may have negotiated a best-in-class deal with your vendor that broke all previous benchmarks.  But if you failed to follow the proper process, when you seek approvals from your CFO, Legal, Procurement, etc., instead of being praised for achieving such a great deal, you may get reprimanded instead.  This can be very frustrating and disheartening, both to you individually and to your program.  Also, delays in obtaining approvals could result in losing some credibility with your vendors because you miscommunicated expectations about getting the deal signed on time.  To avoid these problems, be sure to have your approval process lined up.
• Requirements defined – This one ties back to your business case – what challenges are you trying to solve and what are the desired outcomes? Look at breaking out your functional requirements so you can conduct a product mapping exercise or fit/gap analysis to see how your requirements map to the vendor’s product functionality.  Identify any gaps and potential workarounds you might need.  Break this out by year and confidence level to avoid overbuying.  You want to know what’s coming up in the next twelve, eighteen, and twenty-four months so you feel confident you’re buying the right amount and avoiding “shelfware.”
• Evaluation criteria – This one gets overlooked a bit. You really want to determine the scope and the priority level of what you’re going to evaluate.  Sometimes there’s this desire to just throw everything you can think of into an RFP or issue a standard template RFP because that is what you are accustomed to using.  A better approach is to identify what is actually going to matter in making this decision.  This will narrow your evaluation.  Keep in mind the three evaluation C’s – Capabilities, Culture, and Commercials.  There are sub-bullets within these large buckets, but these cover at a high level what you should be evaluating in identifying a long-term partner.  These criteria should also map back to your business drivers and goals.

What is the impact if all of these are not addressed?  If you’re just negotiating a renewal without any product expansion, many of these are not as important, but if it’s a new initiative or renewal with product expansion, it will have a big impact.  Not all of these foundational organizational readiness aspects are created equal but if you don’t have your business case or stakeholder alignment set, it’s certainly going to affect your negotiation success.  Look at it holistically and see if you have many gaps that could be impactful to your negotiations.  If not, you can keep pressing forward.  But if you see a lot of gaps in these readiness aspects, the recommendation would be to stop what you’re doing, hit the pause button, get your house in order, and then re-engage.  You will be much more successful, and it actually won’t slow you down – it’ll speed you up – because you won’t have these challenges downstream that will take much longer to resolve later in the process.

Organizational Readiness – Execution

Once you have the foundational elements in place, you can turn to execution readiness which focuses more on the vendor-facing sourcing, evaluation, and negotiation.

• Sourcing Process – Have you decided if you are going sole source or competitive bid? Are you going to issue an RFI and an RFP?  Will you have the vendors conduct oral presentations, product demonstrations, etc.?  It’s helpful to know these in advance because all of this must tie in with your timeline to make for a streamlined process without cutting corners.
• Team roles & responsibilities – It is critical to identify your evaluation team, your negotiation team, and what each person’s roles and responsibilities will be within each team. This will help you avoid confusion and present a unified front to the vendors.  It will also enable everyone to stay within their swim lanes and trust each other because everyone knows that there is a thorough and robust process in place.  You’ve planned the work and now you can just work the plan.
• Strategy – Look at your overall timeline and then develop a sequencing of detailed tasks and events designed to garner the greatest leverage possible while hitting your key milestone dates. This is where you want to use those long poles in the tent- – board meetings, steering committee approvals, etc. – to maximize your leverage while driving the process forward.  You can use these as toll gates in order to drive more comprehensive and competitive proposals.  As you look at your strategy and timeline, be careful not to underestimate how long it takes to complete each of these activities.

As a general rule of thumb, if you’re looking to go out to a competitive bid, allow at least four months from the time you’re ready to issue the RFP to execute contracts.  If you already have proposals in place and you’re dealing with no more than 3-4 vendors, allow three months to complete your process and execute contracts.

• Communication approach and guidelines – At this point, you want to set ground rules for your communications and decide on the tone.
  • Who is responsible for speaking with the vendors?
  • Are you going to have a single point of contact?
  • Who should have direct access to the vendors?

Assuming you’re not purchasing a commoditized product, you are looking at a long-term partnership and the tone should reflect that.  If your communication tone does not reflect the proper type of relationship, the vendors won’t respond as anticipated and that will frustrate your process.  Also, determine what should be communicated orally and what should be in writing.  Be sure to designate the level of communications – executive for driving partnership expectations, key stakeholders for important terms and conditions, and technical level for validating functionality meeting requirements.  All of this needs to be coordinated and aligned before you start communicating with your vendors to ensure a streamlined process.

• Identify and prioritize commercial requirements – These are going to be your negotiation goals. In short, you want to know what a highly competitive deal looks like.  That’s going to be influenced by what’s out in the market, but also by your organization’s priorities.  Keep in mind that there’s a difference between data points and benchmarks.  Data points are random terms from prior deals that you may have gathered.  They may or may not apply to your situation.
  • Do you know the scope and the back story for these deals?
  • Was it a competitive bid process or sole sourced?
  • What was the negotiation leverage in place?

If you don’t know those answers, they become just random data points with limited value.

There’s an old saying: If something happens once, it’s an anomaly.  If it happens twice, it’s a trend.  If it happens three times, it’s a pattern.  As you get more data points, like a few dozen, you start to identify patterns and you can put the data points in perspective, and from there you can draw accurate benchmarks as you are able to identify deal scenarios similar to yours.

• Anticipating your vendor’s goals, approach, and behavior – Your goal is to influence your vendor’s negotiation process to get the outcome you want. The vendors are trying to do the same to you.  If you don’t take a look at what matters to them, what they need to achieve, and align that with a ‘carrot and stick’ approach, it’s going to be challenging to achieve your negotiation goals.  You might know what a great deal looks like, but that’s only half the battle.  Achieving that great deal requires persuasiveness.

If you’re asking for non-standard concessions, think about what your vendor needs to provide these concessions.  What is that conversation going to look like as it moves up the chain of command?  Are you arming them with enough information that’s going to be compelling to obtain approval?  This is one area that often gets overlooked.  But by understanding the vendor’s goals and decision-making process, you can persuade them to provide the concessions you desire.

Now that you’ve done all your homework you can confidently begin communicating with your vendors.

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