“Technology has become a business,” says John Winsett, founder and CEO of NPI, which provides IT procurement services such as benchmark analysis and subscription optimization advice. “It's no longer just a public facility. It's no longer just piping and piping.”
But while that technology is critical to business, CFOs are in a pinch. We need to make strong investments in technology, but we need to do it in a cost-effective way. And if there's one market that's difficult to invest in cost-effectively, it's B2B technology. Vendors often hold all the cards, at least from the buyer's perspective. It's difficult to determine the value of a tool or system up front, and few buyers have information about what other companies are paying for the same enterprise software or cloud services. Additionally, the seller runs hundreds of pages and uses his scheme with a license that requires a Ph.D. to interpret.
Winsett calls IT “the most inefficient multi-trillion dollar market that has ever existed.” We reached out to him to get his advice for CFOs facing rising IT prices and a proliferation of product and vendor choices, especially in finance and accounting software.
We hear from CFOs that IT vendors are raising prices, and some of the price increases for cloud-based software updates are many times the rate of inflation.
Spending by our clients has increased dramatically over the past 12 months. And we've seen 600 new vendors. New vendors are trying to gain market share. This means aggressive sales strategies, pricing flexibility and innovative deal structures to differentiate you from your competitors. For IT buyers, this translates into price disparity and complexity.
The most effective revenue extraction machine ever built is the IT vendor marketplace. Vendors are staffed with some of the most highly trained, highly compensated, and highly motivated account teams to ever walk this earth. [CFOs] This is the last line of defense for your safe. I believe that the most difficult job in corporate America is managing IT costs. CFOs are seeing costs rise. No plan, no budget.
What does price differential mean?
The price difference between one vendor is huge. One He SKU can be priced at $100 per user, and another customer's same He SKU can be priced at $200 per user. Why the difference? Because of competitive dynamics. If you were a vendor's first customer, you may have had to be aggressive on price. Or maybe one of your client's girlfriends was better at negotiating deals. Or maybe it was the end of a quarter for a vendor, and the customer got a better deal by closing early.
So how can buyers and customers get more consistent pricing, or at least the best pricing from vendors?
When it comes to managing your IT costs, there are great technologies available around the world to help you visualize your spend, contract lifecycle management, or IT cost allocation. However, IT costs are not mentioned. The only place you can have a meaningful impact on costs is at the point of execution, the “transaction layer” during negotiation. What will move the needle then? Know the price you have to pay. Next, understand deal structures and licensing. Any software company has 10 different ways to purchase their products. They always tend to suggest the most expensive method. [Price and deal structure] If you can't influence vendors to get there, it's all for naught. Negotiation is required here. Changing the direction of costs requires three things: price analysis, licensing expertise, and negotiation support.
What do you offer your customers to help with the first area: price analysis? What do IT buyers need to know going into negotiations?
What price should I pay based on the volume, timing, and context of my product configuration? How do I license my software? Are there alternatives? In some cases, a competitive option may be the most powerful tool you can bring to the table. I often get asked, “Is there a way to do it cheaper?”
what else?
We show our customers how complex a vendor's deal is, how many products it includes, and how much flexibility the vendor exhibits in the market – basically the negotiability of the deal . Next, check whether the vendor's deal size is trending upward or downward. If it is trending upward, the vendor is gaining attention in the market. Trends in size mean competitive pressures exist and vendors may be losing momentum. Buyers should also be aware of the vendor's financial situation. Are they firing people? Are they acquiring other companies?
For accounting systems that cannot be quickly replaced, what will the buyer do if the vendor comes back with a significant price increase that breaks the customer's budget at renewal time? What options do the customer have?
You wouldn't say to Microsoft, “We're going to go in a different direction.” You need to model multiple scenarios. They want to sell you the Cadillac version of what they are going to update with you. This one has the highest level of licenses, the most licenses, let's say he trades for $10 million. Let's say you want to update something and it costs $7 million. That contract will have fewer licenses and lower-level license types. The way to negotiate $7 million is to build a minimum scenario. “Hey Microsoft, we're going to update Office, we're going to update some servers, and that's it. There's no co-pilot. There's no AI.” And that minimum contract costs 400. It's worth millions of dollars. So you tell Microsoft that unless you get a $7 million deal, you're here to stay.
You mentioned that companies need to be careful about including C-level individuals in vendor negotiations at certain times. why is that?
IT sourcing is responsible for most of the negotiations, but the CFO, CIO, and COO may also be involved in high-stakes situations. But it's dangerous to bring in executives at the last minute, thinking the weight of their title will win the day. It often backfires. why? Because it just tells the vendor that you, as a buyer, are very serious. He will bring in the CFO to handle it. So the vendor thinks, “Okay, CFO, this deal is important to you.”
