What's the Hurry? Avoid Premature Scaling of Contracts

Often times you will be presented by a vendor with the opportunity to adopt a group or enterprise license. I wrote that you must be careful with these offers: you may end up overpaying and reducing your ROI. As I often say: not all users are equal.

At a broader level, whether looking at a per user or a group license, always keep in mind that you run the risk of premature scaling of your contracts.

What do I mean by this? I am borrowing this concept from the VC world. It means, essentially, that a business, usually a startup, prioritizes growth of a team, customer acquisition strategies or over building the product without getting to product/market fit first.

I repurpose this: don't grow a contract beyond what the business can support.

To guard against this, you need to maintain close relationships with the senior business planners in your company, usually the CFO and/or CEO. There may be corporate finance activity that you're not  privy to, at least at a detailed level. It is helpful to know what kind of growth, either organic or via acquisition, the firm is anticipating.

Such insight can be critical to ensuring your contracts are adequate to your needs and not over-bought.

For example: you may have seen annual growth in headcount of 15% over the previous 4 years. This trend can only take you so far: as the saying goes, past performance is no guarantee of future success. The firm may be slowing down on hiring. It may plan on divesting a business.

Suppose you're preparing to renew a major contract - a 6 figure contract with strategic vendor. You may believe that you need to accommodate 15% headcount increase annually over the 3 year period of the contract.

As such, you elect to migrate to an enterprise agreement from a per-seat agreement. The ROI is certainly there -- provided growth is in line with your expectations.

Unbeknownst to you, the firm is planning on selling its Latin American business to a competitor and investing in a new business that doesn't use the service you're renewing. Net effect: your user footprint for the service is actually dropping 10% next year, and then growing organically 5% over the next two years - or the final two years of your three year agreement.

You proceed with a new contract, proudly sporting an enterprise agreement with improved unit economics and able to absorb all the new hires your firm won't be making.

You tried to do right for the firm and worked hard for the terms you negotiated - yet ended up reducing the ROI on the spend significantly.

One way avoid this: the firm has a robust procurement policy in place that escalates purchases above a certain dollar amount to senior management, who can veto the purchase. Of course, this is a fail safe mechanism to ensure you're resourcing in a way that aligns with the firm's overall priorities. You still ended up spending several weeks (and lots of goodwill) negotiating for a contract you can't close. 

A better way: maintain open lines of communication with the C-Suite. Know what the lay of the land is for future growth - even if just in broad terms. You should be able to get a sense of this during your annual budgeting process, but it never hurts to be able to reach out to the CTO or CFO and run a couple scenarios by him and see what he thinks.

Communication before action will save you a lot of time and trouble in managing your contract portfolio, particularly when it comes to buying more product than you need. Avoid premature scaling of contracts by communicating early and often with senior management.

- Kevan Huston

This Thing is Going Down

U.S. stocks have been on a historic run over the past few years, that's for sure. I trust you have enjoyed the run.

It will end. That's an absolute certainty.

And the cassandras among us are already preparing for the inevitable downturn.

What do market data and information managers need to do to prepare?

It some sense it's a question of divided loyalties:

• you want to lock in multi-year agreements with vendors to ensure your users have access to the resources they need should budgets be cut, but,
• you know that senior management is eyeing a bull market that's long in the tooth and they're preparing for the inevitable recession or economic downturn. 

Ideally, as part of your budget process, you have already created some sort of cash flow table for your contracts that shows the dollar value of contracts as they expire: this way you and senior management know how much cash will be freed up, and when.

A simple illustration of the concept:

You've also tiered your contracts by importance - must have, nice to have, take it over leave it - so you can get a realistic picture of how much you can cut, when, and at what impact to the business.

My advice? Consider locking in longer term agreements for your strategic vendors with must-have services, without which the business would suffer materially. For less critical services, stick to single year agreements. In fact, this is probably a good idea at any point in the macroeconomic cycle: you want some flexibility in your contract book - a good rule of thumb is that you should be able to cull 10% of your spend within 6 months of being ordered to do so.

Do keep in mind, of course, that a lot of your strategic vendors with must-have services are expensive and you're going to have a lot more spend with these contracts than you will with less critical services. Depending upon the scenarios senior management is envisioning (a 20% reduction? 30%?), you may need to earmark some portion of your strategic, business critical for potential elimination as well. The last thing you want to do is go to your CFO and tell him you quite literally don't have any cash you can spare for another 18 months. Not a good look.

An economic downturn is never fun when you manage a big book of indirect spend like market data or information services. However, it's a lot easier to manage the fall out from a severe downturn in business when you've already got a plan for reducing your spend that aligns with what senior management are planning for.

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