What You Don’t Know Can Hurt You

Whoever first said, “What you don’t know can’t hurt you” never worked in IT sourcing. In our business, clear and comprehensive market intelligence is often the difference maker between beneficial contracts and truly bad deals. Knowledge is also the foundation of true supplier partnerships, as opposed to rocky or legalistic relationships with vendors.

But, in some cases – ERP purchases, for example – it may be impossible for CIOs to know if a deal is a good one or not. This is largely due to the highly complex and frequently incomprehensible nature of ERP pricing and the large vendors’ confusing sales and product bundling practices.

Several years ago, a large enterprise engaged a well known advisory firm to help them negotiate the purchase of a new enterprise software platform. The list price of the software was a few hundred million dollars, with annual net license fees of more than $30 million. This was a huge purchase, to say the least, and the company was smart to engage an advisor to assist with evaluating the pricing and negotiating the contract.

And surely the corporate CIO felt even smarter when his advisor secured an 86% discount on that list price. Everything seemed great, like a true success story. And the advisor certainly wasn’t shy about touting its effective negotiation skills.

But a closer look at the contract revealed it was actually a terrible deal for the client. Included in that huge list price was at least $80 million worth of pure, unadulterated shelfware – software modules and tools that the client was never going to use and did not even bother to install. All that extra software might have been worth buying if the contract offered big cuts on the annual maintenance and licensing fees, which is where the action is for the ERP vendors. (List prices are just for show, a ridiculously high opening bid.)

But no such luck for this corporation (which has since become an UpperEdge client). In the end, that huge discount was just a red herring.

The underlying problem was that the advisor working for the client also had significant business with the software company. In fact, the relationship with the ERP vendor was ultimately much more important than the one-off sourcing advisory deal with this particular client. The CIO was not aware of the extent of the high-level conflict of interest until it was too late. To put it mildly, these relationships can skew incentives and call into question just how good a deal corporate clients receive.

The big idea here is to always understand whom you’re negotiating with and what the incentives are for all involved parties (including third-party advisors). Obviously, we believe clients should have skilled, informed and experienced advisors in sourcing and negotiating any significant software or IT services purchase; but those advisors must be 100% unbiased, fully aligned to client objectives, and completely transparent about their motivations. That is the only way you, as the client, can know just how expensive 86% discounts may be.

So forget “Ignorance is bliss;” when it comes to IT sourcing in general and ERP purchases in particular, “Knowledge is power.” Specifically, market intelligence is the best way to avoid getting hurt by what you don’t know.

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