It’s a common tactic you’ll see with IT software and solutions providers: after drawing in your business with the promise of promotional pricing and straightforward contract agreements, the honeymoon phase abruptly ends when your company is served notice of a rate increase.
IT service providers are notorious for coming back to existing clients with massive upcharges and increases based on either their own operating costs, their claims that your business’s scope of needs is higher than once estimated, or both. Conveniently, those vendors also understand that if you reject their rate and end your contract with them, you’re facing additional costs and disruption by switching to a new provider.
Rate increases take a bite out of your revenue generation and ROI. But instead of panicking or accusing the vendor of predatory business practices, your company should instead focus on lowering these costs by maximizing your leverage, planning ahead, and optimizing your spending to get the best value possible—even as the baseline cost of these services go up.
Read on for some tips on how to lower your IT vendor costs when those service providers come asking for more money.
Structure Contracts to Include Built-In Rate Hikes
Rate increases are an unavoidable part of doing business with vendors—especially when those relationships span years, and even decades. But as a client of that vendor, you don’t have to accept their quoted rate hike without any pushback or renegotiation. And, with a little forward-thinking, you can get ahead of rate hikes by committing to structured increases that both sides determine to be fair.
When negotiating a multi-year contract, for example, consider building in predetermined rate increases on an annual basis to increase those costs gradually. While some business leaders may be reluctant to voluntarily agree to rate hikes far into the future, what you’re actually doing is taking control of that conversation, and giving yourself more leverage, by forcing those negotiations now—when the vendor has more to lose by not working with you to set future pricing.
Conduct an Annual Internal Audit of IT Software Costs
Most IT software vendors provide a range of services and solutions to your business—and each of these solutions carry their own relative value. When the rates for services are increased, it’s useful to conduct an audit of these costs and their ROI to make sure you’re still satisfied with the value of these investments.
If performance is lagging across certain services and solutions, make sure your vendor knows. The same is true if your utilization of certain services within a bundle are falling below expectations: poor returns from one service can be leveraged to get that service removed from your bundle, or you can claim it offsets increasing costs across other, more valuable vendor services.
Negotiate Your Business Out of Service Bundles
Speaking of bundled services: If the vendor’s bundle features services you haven’t used and don’t expect to need in the future, a rate hike is the perfect time to point this out and to negotiate your way out of this poor-value bundle in favor of a la carte pricing.
Will your vendor be happy with this request? No—and they may not agree to it, either. But if the price is going up and the bundle’s already shaky ROI is projected to move even lower, you can stand behind the poor business case of continuing the relationship and threaten to switch providers if a compromise can’t be reached.
Gather Comps and Ask Vendors to Meet or Beat Those Rates
The best way to distinguish market-driven price increases to predatory price-gouging is to gather comps from competing vendors on the market. If prices from those vendors are comparable to what your vendor is asking, you can have more confidence that the vendor’s rate increase is at least fair-market value.
On the other hand, if you get comps that offer significant gains in value, ask your vendor to match or beat those quotes. You’ll have leverage because the vendor will know their requested rate is beyond market value, and you can potentially negotiate that price down to avoid a break in the partnership.
Approach the Negotiating Table Early
One of the worst ways businesses lose leverage in IT vendor negotiations is when they try to lower costs close to the end of a contract’s term. Vendors will be fully aware of the risks your business is taking by not re-upping your contract with them, even at a dramatic rate increase. This short timeline to either sign on the dotted line or select and implement an alternative service provider gives your vendor the upper hand in any negotiation.
Don’t wait until the 11th hour to try and negotiate better rates and terms. Start the contract negotiation process months in advance—even if your business has to initiate the conversation. The more runway you have to negotiate and seek out alternatives, the more leverage your business will have—and the more likely you will be to lower that initial quote.
Looking for a la carte pricing, scalable costs, and fair-market value for the IT services you need—and nothing more? Schedule a call with Origina today to find out how we can help.