UN (MIDDLE) EARTHING SAVINGS: HOW AN ANCIENT CONTRACT SAVED $100,000
Ahsan Mujeeb
Sourcing and Vendor Management Consultant
In our last article, we discussed how you can feel betrayed when you start what you thought would be a ‘simple’ software support renewal, only to find that your software vendor is discontinuing support on your perpetual licenses and forcing you to move to their often more expensive subscription model. It can feel very much like, in The Lord of the Rings, when the wizard Gandalf is betrayed and imprisoned by his once friend and mentor, Saruman. After all, you’ve had a great relationship with this vendor and their sales team, and your organization has experienced reasonable price increases up to this point, so you’re caught completely off guard, and without the necessary budget to pay this increase. We also explained how you might be able to counter such a situation and at least buy yourself time, and the value of following a best practices renewals process to either prevent the situation, or at least mitigate the negative consequences.
In this article, we will look at another situation where a vendor imposed an unreasonable renewal price increase, but, in this case, the tide of the battle was turned by a somewhat unexpected (and very old) participant.
The journey began when a Client received a renewal quote from a software vendor which included a startling 25% price hike from the previous year’s fees. This increase was poised to strain the Client's budget, a scenario likely familiar to many companies in the current economic landscape, because they had only budgeted for up to a 5% increase (something this vendor hadn’t even been averaging over their 10-year relationship with the Client, during which price increases were few and far between). The team let the vendor know that such an increase created an extremely difficult situation for the Client organization and asked repeatedly if a lower, much more reasonable fee increase was possible, but the vendor would not budge, stating that the current inflationary pressure led them to enact this level of increase on all their renewals. Things didn’t look good…just like they didn’t look good for the humans in the Battle of Pelennor Fields, when Suaron’s army was successfully marching on Minas Tirith, the human’s last bastion. Fortunately for the Client, just like for the heroes in our story, there was an ancient power willing to lend a hand.
You see, this Client is a firm believer in the value of Best Practices Sourcing and Vendor Management and, for the past few years, has worked hard to extend that not only to new purchases, but also to renewals, which were often just rubber stamped by the businesspeople who ‘owned’ the solution. However, because they now follow a formal renewals process, which includes reviewing the existing agreement, we were able to unearth protection that had existed for a decade, buried away (not in a labyrinthian cave, but in the contract management system).
Fortunately for the Client, buried deep in the middle of the 10-year-old license agreement for this solution was a clause that prohibited the vendor from raising prices by more than 3% in any renewal. We had actually negotiated that term into the Agreement, as we try to do in all such agreements, when we negotiated it as part of this Client’s sourcing process, ten years ago. But it had been largely lost to the sands of time (since the vendor didn’t really raise prices much at all during the previous terms). When we made the vendor aware of the existence of that clause, and the contractual 3% cap it contained, the vendor knew the battle was over (just like how Aragorn (along with Gimli and Legolas) enlisted the Army of the Dead, a bunch of scary ghosts who had been cursed for their failure to fulfill their oath to the King, to fight the armies of Suaron. Not only did they join the battle on Pelennor Fields, but they were the turning point of the battle and ultimately the war). Armed with this valuable ally, not only was the Client able to hold the vendor to the terms of the original agreement, the team was also able to further negotiate this increase down to 2.6%. Because the renewal was for 3 years, this saved the Client over $100,000, when calculated against the proposed 25% price increase, over this 3-year term. The Client went from feeling powerless and frustrated to feeling a great sense of satisfaction in knowing that their foresight in originally following Best Practices Sourcing and Vendor Management, and subsequently extending that to renewals, not only had served them well in this case, but would continue to do so in the long-term.
In our next, and final, article in this series, we’ll wrap up this discussion on renewals by describing what a Best Practices Renewals Process loos like, and ending with a list of valuable truths you should be considering as you look to your upcoming software and support renewals.
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