One of the privileges of assisting some of the world’s largest businesses in negotiating their software contracts is the ability to reflect on how pressures and outcomes have evolved. As we exit the busy season of the Microsoft year-end, it is an opportunity to reflect on the market, the vendor approach, and where current trends are heading.
Market conditions: customer perspective
We’ve witnessed macro-economic impacts on vendor pricing strategy over the years with the Global Financial Crisis of 2008-9, but equally the double-dip recession in 2012. The impact is not always immediate in which corporate decisions lead to increased prices, or why the flexibility of licensing terms is adjusted. Rather, these decisions are typically all tied to one objective… to increase profitability.
In 2024, the market conditions are taking an unusual shift with unprecedented macro-economic cost pressures, and geo-political unrest all affecting the approach from the vendor, but equally from the consumer towards overall operating cost management.
From the customer lens, increased cost pressures require genuine validation of spend, KPIs are rolled out to IT and procurement functions to reduce cost whilst managing the complex backdrop of innovation and vendor pricing policy. It is not unusual to meet with IT and strategic sourcing professionals who share their concerns over trying to contain new investment demand, whilst an as-is renewal is way beyond budgeted spend.
Finally, sustainability is often at the forefront of contracts. Environmental, Social and Governance (ESG), sustainability and GreenOps are rapidly gaining traction with 75% of a recent Gartner Board of Director survey* predicting a planned increase in sustainability investment. I would agree with an increased demand for ESG reporting, and we have seen that GreenOps has risen in “prioritisation” from our own FinOps assessments, and some customers cite that minimum sustainability metrics must be included in tender and RFP responses.
*Source: Gartner “2024 Board of Directors Survey: Elevate Sustainability Value”,
https://www.gartner.com/document/5533395
Market conditions: Vendor Perspective
The vendor perspective is quite complex; on the one hand, customers are applying more pressure with much more sophisticated negotiation techniques to reduce the projected Total Contract Value (TCV), whilst a new air of confidence is taking over the previously “partner-like” sales consultant.
It is usually at this point that the customer is perplexed as to what has changed for the same vendor to exhibit such a differing approach to negotiation styles.
The answer is quite simple: most vendors have heavily invested in shifting the customer base towards subscription-based pricing, often cloud-based and more recently, to contracts written to be hyper-scaled.
The simple translation would be very sticky and difficult to walk away from. Within modern negotiation cycles, we expect the vendor to utilize delay tactics, offer poor or no discounts on existing spend, and lever this lack of discounting towards new revenue lines with a significant uptick in revenue and an incremental annual increase with pre-agreed eroded discounting.
Finally, 2024 is the year of landing innovation on a global scale. Across most customers, we are seeing a series of new innovations become much more than a new ‘nice to have’ capability.
The days of “we’ll never be the first to adopt new technology,” seem to have disintegrated with the general availability of artificial intelligence, Large Language models (LLMs) available for integration plus low or no-code development.
Interestingly, the global acceptance of artificial intelligence has witnessed unprecedented, reduced empowerment to encourage adoption with limited to no discounting, limited buying allowances i.e. invitation only on initial general availability and global currency alignment.
The impact is quite astounding with much less buying power on early adoption to encourage rapid early innovation market share to a very confident vendor knowing the technology is in demand across all levels of business.
How should you prepare for your next negotiation?
Planning for negotiations requires a new approach, pivoting away from brand power, top-to-top relationships or even traditional negotiation techniques. I would advocate the following:
- Plan ahead – Allocate at least 3 months to engage with the vendor but plan to start planning ideally a year before renewal.
- Validate demand – Often contracts include complex licensing packaging and discounting to make it feel like only one option exists, or “it's cheaper to buy the bundle”. In reality, it is often very difficult to price for just the components you need and not the ones you don’t.
- Understand market conditions – Appreciate why the vendor has shifted in their approach.
- Contract terms – Does your new contract facilitate hyper-scaled terminology? For example, a change in terms, service update or condition can change without notice.
- Evaluate alternatives – Often not very straight forward but alternatives often do exist, even for support offerings.
- Future demand – Appreciate what is coming – can this be committed to, or is this still under evaluation?
- Internal alignment – Ensure all stakeholders understand the planned approach to vendor negotiation ensuring any pre-agreed “gives” are not exhausted at the start of a negotiation cycle.
Contract negotiations are more complex than ever before. If all this sounds daunting, my team of experts is here to help. They navigate the complexities of vendor contracts and understand the internal empowerment levels that can be achieved.
I’d encourage you to get in touch and we can help review the potential ROI we can unlock within your next renewal cycle.
About the author:
Gareth Redshaw, Snr Director of Livingstone’s Business Consulting Services.
Gareth has been involved IT commercial negotiations for over 20 years and have pivoted from vendor-specific sales roles to developing and executing negotiations for some of the world’s most recognisable brands covering Global Banking, Retailors, Technology Giants, manufacturers, Energy and large public sector departments amongst others.
