A Vendor's Fiscal Year End is Your Friend

You can never get enough intelligence when negotiating with an information service vendor (or any vendor).

One negotiating lever that may not be top of mind: your counterparty's fiscal year end.

Wait, what?

I wrote about the exploding offer bluff in which vendors will try to incentivize you to sign an allegedly discounted offer that expires at the end of the month (or quarter). In my experience, in most cases these tactics are bluffs you can call and not worry about the "discount" not being offered the next period. You can take your time and make sure the product or service meets your requirements and the vendor passes all due diligence flags.

But there is one instance when a time-based discount really is exploding and that's the fiscal year end. You can use this to your advantage, particularly if the deal is a renewal and your contract expires a few months after the vendor's fiscal YE.

How? Suppose you know the service is one you'd definitely like to renew. Let's say your contract expires 3/31 and the vendor's fiscal year end is 12/31 (as is common). Why not reach out in December and see what kind of incentives the vendor can offer for an early renewal, and one that they can book before their year end?

Here's what I like to do:

Under the pretense of budget forecasting, contact the vendor and say you'd like to lock in a renewal now while you have budget flexibility.

A vendor will always be willing to renew, but if they can actually modify the renewal such that the contract begins before their year end, they may well adopt a more flexible negotiating posture. In this case, if the contract were repapered to start in December they can book the revenue (or a portion thereof, depending on accounting treatment), before the new year.

So take them up on it! But ask for a 15-month contract with three free months. You'd be surprised how often a vendor would go for this - or at least a reduced rate that gets you a month free.

Our illustrative contract negotiation might look like this:

Current: 4/1/2012 - 3/31/2013. Cost: $60,000 or $5,000 per service month.

Expected Renewal: 4/1/2013 - 3/31/2014. Cost: $66,000 for 12 months or $5,500 per service month.

Alternate Renewal A: 12/31/2012 - 3/31/14. Cost: $66,000 for 15 months or $4,400 per service month.

Alternate Renewal B: 12/31/2012 - 12/30/2013. Cost: $60,000 for 12 months or $5,000 per service month.

Alternate Renewal C: 12/31/2012 - 3/31/15. Cost: $132,000 for 27 months or $4,888 per service month

Now you may not believe you could get a 20% reduction in your monthly cost, but I have personally negotiated deals this favorable, and all because we were able take advantage of the fiscal year end lever.

Even if you can't get three free months, there are going to be other concessions you can extract, monetary or non-monetary. Maybe you could counter with a flat renewal if you agree to move the contract period forward (Alternate Renewal B). Or perhaps you can get a flat two year renewal - that would make certainly make the three free months more palatable to the vendor (Alternate Renewal C). The options are endless, but you'll never know what you could get if you don't ask! In this case, a vendor would be very tempted by Alternate Renewal C.

Always look for unorthodox levers when you're preparing to negotiate. At the very least, you'll have negotiating points that you can relent on and then characterize this as a concession to get other, more desirable levers.  A fiscal year end sweetener is an unorthodox lever, and may just work if you play your cards right.

- Kevan Huston

The Top Line is All Important to Vendors - and You Can Use This to Your Advantage.

If there's one thing a sales professional wants to avoid at all costs is a decline in the revenue they're getting from a client. In fact, no one in any company wants to see revenue decline. I mean, obviously.

So how can you use this fact to your benefit in your vendor negotiations?

Start with the assumption that a revenue decline is a non-starter with your counterparty - he can't go back to management with a 10% reduction in spend.

What's more acceptable (but still unpalatable) is a decline in margin. A company, in my experience, is willing to take a margin hit before a revenue decline. Why? Because upon subsequent renewal the revenue number is the starting point for any renewal proposal. It acts as a presumptive statement of the value of the service. Vendors would all things being equal prefer to negotiate non-monetary concessions than hard dollar ones. And who can blame them?

What that leaves you with is ... lots of non-monetary concessions to work with. Some common ones:

• Additional seats or users 
• Additional service modules
• Analyst conference calls
• Passes to vendor conferences

Vendors may be particularly willing to make concessions on services with low variable costs like additional seats (conferences and analyst calls don't scale the way syndicated content does), so you may be surprised by how much negotiating leverage you have to increase your license size. 

A word of caution: be careful with concessions that expand the user footprint within your org. The more seats or licenses a vendor has within your company, the stickier the service becomes - which the vendor may in turn use against you when the next renewal negotiation comes up. You can always try to guard against this by having an internal usage monitoring program, but be prepared to counter the vendor on this point. 

No company wants to see their revenue decline. An information services vendor may well compromise on margin, particularly for goods with a low variable cost structure. Concede on revenue if the service is worth it, then use that concession to extract non-monetary add-ons that have the potential to increase your overall product ROI. 

- Kevan Huston

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