One of the easiest ways to negotiate a discount on an original contract or a renewal is to agree to a multi-year term. Vendors love the idea of locking in revenue over the long term and a multi-year agreement is the easiest way to do that. They should also work hard to manage your relationship and keep you happy so that you’ll renew at the end of the initial term. However, contract renewals and negotiations are resource devouring processes that they would rather avoid. So would you, as the client. There are a few things to consider before automatically jumping into a long-term contract, though.
If you’re going to agree to three or five years of a service or product that relies on technology, it’s important to determine whether that technology will be relevant so far down the road. If you’re utilizing technology that is soon to be replaced with better/faster stuff, you may end up stuck with a solution that doesn’t allow you to compete with your more agile cohort.
Something that directly benefits you as a business consumer is vendor competition. If the market for a particular solution is growing with copy cats, prices will undoubtedly fall and offerings will quickly expand. Social networks for the enterprise is a perfect example. More frequent renegotiations would be to your benefit.
If you know that you will be growing quickly in the near future, but you aren’t ready to share that with a vendor, a shorter term will allow you to renegotiate when you have more users – a situation that usually nets you a lower per-unit price. You can also factor in tier-based pricing that automatically reduces your costs as you grow past certain milestones, but many vendors don’t offer such arrangements.
There are other things to consider when deciding on a term length, but this should get you started thinking about the possibilities. Your situation will bring up issues specifically related to your business. In the end, you’ll be able to find a term length that fits your needs and maximizes your savings.
If you’d like to discover more ways to save money, avoid costs, and increase net profits for your company, contact GHS today!
Category Archives: Contract Savings
One Monday, I was asked to review a contract renewal. In it, the vendor had proposed a one year extension of services with a 4% increase in pricing. As the client had used the vendor’s services for a few years, and earlier analysis showed the pricing and product to be in line with the market, the client had intended from the start to renew at least twice. My review was a sanity check.
My initial thought was that doubling the renewal term was a safe bet and would reduce the cost increase by half. I also noted that the 4% increase seemed reasonable on the surface, but it wasn’t so great in light of the current economy. Flipping back through the original contract, I highlighted the clause I had originally included which limited price increases to 5% or CPI, whichever was lower. A quick check of the tables showed that CPI was definitely the better option at 1.7%.
Had this been a $100k contract, here’s how it would have broken down:
Original Renewal Request:
– 1 year @ 4% = Two-year total cost of $212,160
Revised Renewal Agreement:
– 2 years @ 1.7% = Two-year total cost of $203,400
That’s a savings of $8,760 for five minutes of review (and a well-written original contract). What could your company do with a 4% cost avoidance?
To find out more ways to save money on your contract portfolio, contact GHS today!