Beware the Exploding Offer Bluff

As we head into the Labor Day long weekend, we note that this year Friday is the 31st, a.k.a. the end of the month.

Yesterday I wrote about the car buying experience and its applicability to information resource renewals.

I have bought three cars from dealers over the years - one new and two used. In each case, I negotiated the sale on the 28th or 29th of the month - and one, on December 28th - the end of the month, quarter, and calendar year. I bet I was the only customer they had between Christmas and New Year's! And I got great deals each time.

As in buying a car, you will also find that the end of the month is a big deal for sales pros at market data and information services vendors.

You've likely heard one or more of the following from a vendor:

• The offer expires 7/31
• We really need to get this signed before the 1st 
• I won't be able to offer this discount next month. 

What's driving this? Simple: companies can book, and often recognize, the revenue (or a portion of it) in the current month. That's why sales people always want to close a sale in the current month.

The problem is, these "deals" don't "expire". In effect, the vendor is showing their cards on their ability and willingness to negotiate. Don't far for one of the oldest sales tactics on the books.

The "discount" will still be available on the 1st, just as it was on the 31st.

It's not like information services vendors have expensive inventory they're carrying. These are highly scalable, low variable cost businesses. They don't have lots of working capital tied up in inventory. In fact, they don't have inventory per se - their product is non-rivalrous: selling you a subscription to X service doesn't mean they can't also sell it to Y. So you're not taking any inventory off their hands. They don't have to ship un-sold inventory back to the OEM.

What to do?

First, consider the merits of the deal, independent of whether the offer is exploding. A deadline to sign shouldn't necessarily factor into your decision around the value of the product for your organization. However, if the deal is a good one, why not take advantage of it?

Second, see the "discount" for what it is: pricing flexibility. Look at what other concessions you can extract from a vendor that's not playing firm on price. Can you get a CPI cap? A flat renewal? Additional licenses, if the ROI is there? The opportunities that open up in this scenario are many. Take advantage of them.

Third, use the end of the month tactic yourself to negotiate better deals, particularly on renewals. The earlier you start the renewals process, the more likely you are to realize savings. Say you have a service that expires 4/30 that you know you want to renew. Why not reach out in February and discuss early renewal? Your sales people at the vendor may have more flexibility on pricing if you can close a renewal with them by 2/28. Take a stab at it -- but don't appear too eager to renew, thereby undercutting your negotiating leverage.

As with most aspects of negotiation, there are two sides to every gambit. Use end of the month urgency to your advantage when negotiating renewals - you may be surprised at the savings you can extract from the seller. But don't allow vendors to use this tactic on you to get you to sign for something you don't necessarily need.

- Kevan Huston

Create a Competitive Bidding Environment to Drive Down Prices

In 2004 I bought a new car, a Honda CR-V, for invoice price - at the time $19,152.

Invoice price is what the manufacturer invoices the dealer for the car. The dealer usually ends up paying less (dealer cost) than the invoice price due to incentives like holdbacks and rebates, but in car buying world, getting invoice price for a Japanese import, is a pretty solid deal. I was pleased.

How do it I do it? I created a competitive marketplace for myself, by getting dealerships to compete against one another. I called and faxed every dealership in the tri-state NYC area, told them I knew the MSRP, dealer cost, and rebate profile (there weren't any rebates for the CR-V I was buying) for the make and model I wanted.

I got about 10 offers, most of which were a few hundred over invoice price, a couple were MSRP, and one was invoice price.

The dealers knew they were competing with each other because I told them they were! I signed a purchase agreement from the winning bidder without ever stepping foot in a dealership. It was glorious.

To get the best price from your information services vendors, try to do something like I did with the auto dealership.

When you have a renewal coming up for a product that has direct competition from other vendors, put your spend in play for all comers. This is not unlike an RFP process, but here, you're requirements are typically much more limited -- you know the content you need, so you're basically selecting on price alone. In other words, you're buying a commodity-like service. Price is the differentiater.

When the incumbent vendor presents you with renewal papers (no doubt with an outrageous price increase), explain that you're carefully considering another vendor for the business. They will know who their competitors are and their product offerings, so make sure you know your stuff about the competitions offerings.

You may well prefer the incumbent, and have every intention to renew, even at a price increase, but why not make them work for the business? Tell the incumbent you are getting a very attractive offer from the other firm, one that beats their offer and compensates you for any switching costs associated with moving to them.

Odds are you'll get a revised offer rather quickly.

Be prepared for the incumbent to call your bluff. They may think their product is actually worth the bid they've put forward, but I have not seen a situation in which a vendor with a direct competitor won't revise their offer down when you threaten to switch. Not once.

Of course, this doesn't work with every vendor - there's lots of small specialized outfits like Nilson Report or Grant's Interest Rate Observer where the price is the price, take it or leave it. These publications have no direct competition! They know you'll renew. And of course, this tactic won't work with exchanges (monopolies) and indices (switching costs).

But for most syndicated content vendors, and many content platforms, creating a competitive bidding environment gives you substantial leverage - you may even get a price reduction from what you're currently paying.

- Kevan Huston

But Wait - Why Are You Increasing My Price at All?

In a post yesterday I advocated for CPI caps when renewing a contract.

But wait - why accept a price increase at all?

Think about it: vendors have us conditioned to believe that, year after year, the price of their product will simply go up as though by some universal and unyielding law of nature.

But why? Have you ever just straight up asked a vendor why they're raising prices?

Do it. Expect answers will be along the lines of:

1. We're rightsizing your contract to be line with the pricing of other firms like yours;
2. You've been on a discounted rate for several years now and we're aligning you with our rate card;
3. We're making some investments in the service that we think you will really appreciate;
4. We see that you're getting tremendous value out of the product and want to strengthen our partnership going forward

None of these explanations justify a price increase.  Consider the following counterarguments: 

1. There is no "rightsizing" of a contract. What you pay relative to other firms is not relevant - and not your problem. My response to this claim: we take that as a compliment to our negotiating abilities! Please send our regrets to our competitors that they weren't able to negotiate such a deal. 
2. Discounted rates are meaningless. There is no "rate card" - this isn't McDonald's. Price to value is the only metric that should matter. What value are you getting from the contract, and at what price? The only trend line that should matter is what you have been paying historically. 
3. Capex is one of my favorite topics to negotiate with vendors. I talk about it here. I'm not going to subsidize your product development unless I can thoroughly evaluate the value of the product enhancement first. 
4. This doesn't mean anything. If a vendor wants to strengthen the relationship, they can lower our price. 

More generally, when confronted with a price increase and there's no evidence of value-add, that it's simply an inflationary increase, I point to the reality of vendor's business model.

Content syndication, like SaaS, is a highly scalable business with low variable costs. All things being equal, why should our price go up 10%? Have the vendors Cost of Goods Sold gone up 10%? Highly unlikely. After R&D and editorial, most revenue in a well run content business drops to the bottom line. If a vendor publishes a research report, the costs of selling that report to a marginal user is minimal. So that 10% increase is likely just profit for the vendor. Why should you hand over that margin to them? 

Here is where, as a concession, a CPI clause can possibly be negotiated. Any more than that is highly suspect: what, apart from government manipulated markets like healthcare and education, goes up 10% y/o/y? The claim is frankly absurd - particularly in a highly scalable business like content syndication. 

This all assumes, of course, that even a flat renewal is acceptable. There are instances where a price reduction could be warranted, which I will address in a subsequent post. 

- Kevan Huston

CPI Caps are to Contracts what the Railroads are to Monopoly.

I have always argued that CPI caps are the Monopoly Railroads of contract negotiations: highly coveted and extremely valuable, one would be crazy to part with them.

OK, the analogy only takes you so far, but you get my point. If you can negotiate a CPI cap to your contract (perhaps even in a Master Service Agreement), you are setting yourself up for greatness.

What's a CPI cap you ask? Simple: it's a cap on how much a vendor can increase your prices based on the Consumer Price Index, commonly known as inflation.

In contract negotiations, I will often attempt to get a price escalation clause included for a service. It is more common to see these with larger vendors like S&P Global and Thomson Reuters, which offer services where demand is relatively inelastic -- and therefore predictable.  In return for this stable, recurring revenue, a vendor may be comfortable with a cap on price increases. Nevertheless, do ask for these clauses with smaller vendors - you'll often be able to get them added.

An escalation clause may read something along the lines of:

"Beginning on the anniversary of the Effective Date, and upon the each succeeding anniversary of the Effective Date, Provider may increase the-then current price of Service by U.S. C.P.I."

A couple of points here.

First, make sure it's indicated exactly what is meant by C.P.I. The Bureau of Labor Statistics in the United States published dozens of different consumer price indices. The CPI I see used most often is the Urban Consumer C.P.I., which is the broadest measure of consumer prices in the U.S.

Next, be careful to specify which category you want to use - you may want to exclude energy prices, which are highly volatile. You may want to limit it to the category the most closely matches the industry you're purchasing from. And you may want to define geography, such as City Average. But as a rule, Urban Consumer CPI All-items will often suffice.

I also recommend to specify to use Non-seasonally adjusted indices: seasonally adjusted indices are subject to change and can add unnecessary confusion into your contract.

Finally, do you want to have floors and ceilings on C.P.I.? We've been spoiled for the last 35 years with relatively stable consumer prices (apart from housing and healthcare of course), but in a period of high or even hyper-inflation, how would you feel about paying a 15% increase next year for the same service? It's unlikely, but why take the chance? Similarly - and this is rare - what if C.P.I. actually goes down? Do you want to be able to reduce your cost next year?

With these factors in mind our example price escalation clause reads more like:

"Beginning on the anniversary of the Effective Date, and upon each succeeding anniversary of the Effective Date, Provider may increase the then-current price of the Service by the last twelve month percentage change in The Consumer Price Index for All Urban Consumers (CPI-U), U.S. City Average, All items, not seasonally adjusted, as published by the U.S. Department of Labor ("Index"). Notwithstanding the foregoing, the price for the Service shall not increase by more than 5% from the-then current price. In the event the Index declines during the applicable calculation period, the renewal price shall reflect this, but not to exceed a decrease of more than 5%."

Feel free to add an example calculation to this clause as well, and reference the actual URL from the Department of Labor's Bureau of Labor Statistics that shows the C.P.I. you want to use. Leave nothing to chance!

Caution: be aware that an escalation clause can often be accompanied by a volume or spending floor: you're required to maintain a certain spend with the vendor upon renewal in order for the cap to be applied.

Price caps can be a great addition to any contract and can help with your budgeting immensely. It never hurts to try to get one added to a contract.

None of the forgoing should be construed as legal advice. Consult a competent attorney before signing any contracts!

- Kevan Huston

Nothing is Written in Stone. You Can -- and Should -- Negotiate Legal Terms with Vendors

What man can create, man can change. Vendors aren't G-d and you aren't Moses!

When it comes to contracts there's nothing written in stone. This is a phrase I use often when working with vendors and business stakeholders when negotiating contracts. With very few exceptions such as stock exchanges, you can change legal terms and conditions in a contract to your liking. Yes, you will need to negotiate hard to get some changes, like a cap on damages, while others probably just require asking - like a mutual indemnity clause.

Many vendors will present T&Cs as though they are, in fact, written in stone and descended from Mt. Sinai. Don't believe it. Everything is on the table.

Think about it: if vendors are willing to negotiate commercial terms, why wouldn't the same apply to legal terms?

Ideally, your firm has contract policies set by the Vendor Management Office (VMO) that govern what the firm will contract to. You can point to these policies to make negotiation easier. You'll also find contracts with some smaller vendors that are out of compliance with GDPR or other regulations. Of course, the bigger your firm is, the more purchasing power you have and the more likely you'll be able to tell the vendor your legal requirements are "take it or leave it". But with some persuasion you should be able to get some movement on legal terms that seem onerous, overzealous or carry undue financial or reputational risk for you as a buyer.

Below is a list of common legal terms that you and your legal counsel should pay careful attention to before signing any contract.

• Assignment
• Breach 
• Cap on Damages 
• Confidentiality
• Dispute Resolution
• Indemnification
• Jurisdiction
• Privacy
• Use of Data
• Waiver

Make sure to ask the vendor to send the contract to you in Microsoft Word so you can "redline" the paperwork and submit your modifications in a traceable format. Your staff attorney or outside counsel will be well-versed in such a process.

The above information is not intended to be legal advice. Consult a competent attorney before signing any contract on behalf of your firm.

- Kevan Huston

I Didn't Ask for Nautilus Machines. Why Am I Paying for Them?

Do you enjoy seeing your gym membership go up 20% after the gym "invested" in a whole new set of Nautilus machines when you only use free weights?

Yeah, me neither.

One of the more frustrating aspects of negotiating a renewal with a market data or information services vendor is the Service Enhancement argument which goes something along the lines of:

"As you look at your investment for next year, we'd like to highlight several additional content sets we've added to your service".

There's so much wrong here.

I am being asked to pay for services I didn't actually contract for. IOW - the value of the service is based on the composition of the service when I subscribed to it. The notion that it's now "worth" more because a vendor added services I didn't ask for (and for which I haven't established a value proposition) is unproven at, and at worst, disingenuous.

Particularly galling, of course, is when a vendor tries to justify a price increase based on service enhancements that haven't even taken place yet.

Push back on these arguments. How? Point out that:

1) I didn't ask for the service addition and my value proposition is based on the product without the enhancement;
2) I have no way of establishing the value of the new service, particularly if it's one promised and not yet actually released.
3) Even if, as vendor-supplied data suggests, it was used by subscribers, this alone is unpersuasive: we didn't market the enhancement internally, train users on it, or otherwise systematically calculate an ROI for it.

For claimed service enhancements during your current contract period:

Tell your vendor you're happy to look at it on a trial basis, and require they ring fence access to the service to select pilot users so you can determine the actual value of the enhancement.

But the vendor will argue: the enhancements can't be carved out separately - they're embedded in the existing service.

Reply, that's fine, but how can I know what portion of product usage is based on these enhancements? When were they made? How can you claim there's provable value if the new service/content is commingled with the content set you originally contracted for?

Tell your vendor you're happy to properly consider the enhancements over a full contract period during which you can conduct a proper evaluation, and then pay more should it be worth it, but you won't pay for it for this renewal.

For service enhancements promised for the next contract period:

Absolutely put your foot down on this. Product development and go-to-market cycles are wildly unpredictable. A March release of an enhancement may well be pushed to July. The functionality may be limited or buggy.  You won't pay for a service that doesn't exist yet. You won't subsidize their product capex. Period. Would you take out a mortgage on a home that isn't on the market yet and pay interest on an asset you don't own? The notion is preposterous.

Pay for only what you need. Unsolicited product enhancements need to prove their worth before you pay for them.

- Kevan Huston

Manage Auto-Renewals The Easy Way: Cancel When You Sign

There's many a slip 'twixt a cup and a lip, says the proverb.

Even with the most robust renewals management workflow, you will always run the risk that a contract you want to cancel ends up auto-renewing.

You can automate your process almost end to end with contract management solutions like Icertis or Apttus, but invariably some papers actually need to be signed by a specimen of homo sapiens.

Things happen, papers don't get signed. A signatory is on vacation and can't be reached. A cancellation date was misinterpreted. And a $50K contract ends up renewing, even though you don't need it and haven't budgeted for it.

Not good.

Two things I do to prevent this

1. Strike auto-renewal provisions from contracts. Vendors will object, saying they're "standard". Push back. The only reason a vendor wants an auto-renewal is because they're counting on you to forget to cancel. Auto-renewals lower churn and increase recurring revenue, simple as that. If a vendor won't budge, limit the notice of cancellation to 30 days from the end of the then current term and add a clause requiring you get 60 days notice of renewal with renewal terms (pricing).  That gives you 30 days to digest the renewal offer before deciding to renew. 
2. Serve notice of cancellation when you sign the contract. If you really must sign an auto-renewal agreement, simply submit what I like to call pre-cautionary notice of cancellation when you send back the contract. On your cancellation notice, make sure you reference the Order Form and all agreements incorporated therein, including document name, date, number (if available), and signing officer.  Make sure the same person who signed the contract also signs the notice of cancellation. You can have them do it when they sign the contract. 

There are caveats. Do you have favorable terms in your contract that might be at risk if you cancel? Things like a CPI cap on price increases? Of course, a vendor can always try to force you to repaper with terms that strip out price increase caps, but an auto-renewal feature might help grandfather you in, and make you less of a target for renegotiated terms. 

If you take an aggressive approach to auto-renewals by cancelling when signing, be prepared for feigned offense from your counterparty. Don't be cowed. Auto-renews have the potential to play havoc on your budgeting. 

- Kevan Huston

Change of Control and Opportunities for Cost Savings

It's important to keep track of "M&A" among your suppliers for a number of reasons: compliance, contractual implications (known as assignment clauses), conflicts of interest, and other boring contract housekeeping stuff. 

But change in control can offer an opportunity for significant cost savings too. 

Mergers, acquisitions, divestitures, and spin-offs are very common in the B2B information services and market data space. Common are the following types of deals: 

• Two large providers combine, such as the IHS - Markit deal in 2016
• A large vendor buys a smaller, niche publication, such as the Acuris purchase of SparkSpread in 2018
• A division is sold or divested from one owner to another, such as Thomson Corp.'s sale of its Finance & Risk division to Blackstone, also in 2018
• A PE or VC firm makes a big investment in one of your vendors, or your vendor closes another round of funding, such as the huge Series A Alpha-Sense closed in 2016

Sometimes you'll get two or more of these at once, as when DrillingInfo bought competitors 1Derrick and PLS, and then was promptly sold by Insight to Genstar just days later.

When a deal goes down, in all likelihood a rep from the new owner will be reaching out to discuss your contracts. Take the opportunity to review the new owner's service offerings for cost savings and ROI gains: 

• How does your existing TargetCo subscription tie into, or overlap, with the BuyerCo product offerings? A small, niche acquisition is usually integrated with a similar product - are you paying twice for the same content? The vendor may squawk - no, there's no overlap! Make the case there is, and the cost you pay should be reduced to reflect this.
• If you have subscriptions with both the TargetCo and BuyerCo, think about what kind of economies of scale you can realize with the combined spend. If you spend $500K with TargetCo and $500K with BuyerCo, should you really be paying $1,000,000 when they merge? Argue that purchasing power should apply across your entire spend with a vendor, not just for single specific product (something you should be arguing with all your vendors anyway)
• Take advantage of the disarray at the new owner (trust me: these deals are absolute chaos for months after close): can you get your contract repapered with better terms? Can you bolt on other BuyerCo offerings you've been eyeing but were over budget? This may be the time strike a great deal. 

Depending on the complexity of the acquisition, you may be looking at a change in license structure, changes that may not benefit you. If you know the BuyerCo favors licenses unfavorable to you, try extending your contract with the TargetCo before the deal closes, effectively grandfathering you in for a couple years before a new less attractive license structure is forced on you. 

I recommend creating alerts in Factiva, MergerMarket or Nexis to track your portfolio of vendors for significant M&A, Funding or C-Level changes. There may be cost savings and ROI opportunities if you play your cards right. 

- Kevan Huston

Beware Vendors Bearing "Free" Product

As a boy, one of my favorite novels was Robert Heinlein's The Moon is a Harsh Mistress, the great libertarian science fiction novel that popularized the phrase "TANSTAAFL!"

There Ain't No Such Thing As A Free Lunch.

No, no there isn't. Not on the moon and not for corporate information services Earthlings either. 

So when your vendors come promising "free" seats, product enhancements or additional services, keep this phrase in mind. 

In a post yesterday I cautioned against adding group subscriptions that overstate the ROI of a resource.

But what about the opposite: the vendor is offering you free seats  above and beyond what you initially subscribed to.

What's not to like here? Plenty. 

Let's take a hypothetical example. 

You subscribe to Horizon Research at a cost of $100,000 per year for 10 seats.  You have buy-in from the departments who plan on using the product, US and UK Sales. Each department is taking 5 seats, at $10,000 per seat. 

Budget for Horizon Research:

UK Sales: $50,000

US Sales: $50,000

Over the course of the year, Horizon offers you 5 more seats for people who've been asking for access. Horizon points out that several users have been sharing passwords, and they'd be happy to add a few seats to the new users.

You say fine. You're now getting 15 seats for the cost 10. The new users start using Horizon, integrating their data into their field manuals and sales forecasting models. They love it. 

Then renewal comes around. Horizon quotes you $150,000 for 15 users. Since Horizon knows how valuable the service is, they aren't budging on price, and aren't given you a volume discount. The Sales orgs haven't budgeted for a 50% price increase; you had told them they'd be looking at 5-8% max. You've got angry sales planners who've built workflows around a service they're going to lose. 

Oops. 

Takeaway: Manage demand carefully. Sometimes you need to say no to free stuff. Price regulates demand: when you offer something for free, demand is limitless. 

TANSTAAFL!

- Kevan Huston

Are Enterprise Subscriptions Worth it?

Managers are often given the opportunity to contract for "enterprise" or "group" level subscriptions to web-based resources like MergerMarket or Pitchbook.

These subscriptions at first glance appear attractive: there's no per user or flat-rate cost for each seat you use.

Suppose a vendor comes to you with two contract options:

Per-user: $150/mo. per user, no tiered pricing (each new user is $150 pro rata);
Group: $2,000/mo. for Group access. The Group has 20 people in it. That's $100/user per month!

It's a no-brainer: simple math tells you to take Option 2.

No so fast.

Not all your users in the group have roles that benefit from the service. You may provision each person with the resource, but how many actually need the service? And how many will use it? How often?

Let's suppose you have a time machine that allows you to zoom ahead a year and see how the product ends up being used. Your future data shows that while you may have 20 subscribers, only 5 people are front office, and of those, only 4 people used the service at least weekly.

Your data are telling you that of the 20 people licensed for the service, only 4 are meaningful ROI+ users.

So if you were on a per-seat license, you'd be paying $600/mo. versus $2,000 a month for the group license.

With Option 1 you're paying $150 a month per user for four active users. With Option 2 you're paying $500 a month per user for your four active users.

This analysis tells you to take Option 1.

Absent a time machine, what should you do?

My recommendation is to start small with a limited, preferably per seat, license. Your unit costs may be higher in year 1, but you will have good qualitative data on the utility of the service, and, using a service like Research Monitor or OneLog, you'll have quantifiable data on usage patterns as well. Word of mouth from subscribers will potentially drive interest from other members of the Group, thereby justifying a switch to a group license upon renewal.

Start small, force the vendor to demonstrate actual value, before you go enterprise.

And remember, you can always repaper a contract before the term ends! If it really looks like the ROI is there for a group license, renegotiate - nothing is written in stone.

- Kevan Huston

Why this Blog?

Why this blog? Why now?

There are few categories of indirect spend that are more challenging for corporations to manage than external, "third party" data and content. Every firm of any size has this expense: from the small wealth management office with a couple of FT.com subscriptions and a Bloomberg terminal to multinational financial services firms with hundreds of millions in annual spend on thousands of vendors. Invariably, no matter the profile of your firm, there are ways to reduce costs and improve your administration of this category.

I want to help. That's the goal, anyway.

The complexity of managing this category are only increasing. Consider just a few drivers:

• The proliferation of suppliers, content types, and delivery platforms; 
• Increasingly sophisticated capabilities of internal IT departments; 
• The variety of pricing and licensing structures for companies to choose from; 
• Enhanced regulatory requirements governing commercial relationships like GDPR; and 
• Internal demands from companies to manage and allocate costs are all driving increased interest in, and demand for, a rigorous and accountable approach to third party content management.

Drawing on over 20 years of professional experience in banks, consulting firms, and technology companies, I offer insights, advice and analysis on market data and information management, contract negotiation and administration, sourcing and vendor management.

I will be covering the full life cycle of third party content from user and business needs assessment to demand management to business library administration to cost allocations. No matter the extent of your role, if you touch on anything related to market data or external content, there should be something of value to you here.

- Kevan Huston