Vendor management is a discipline that enables organizations to control costs, drive service excellence and mitigate risks to gain increased value from their vendors throughout the deal life cycle.
Our research team helps clients select the right vendors; categorize vendors to ensure the right contract, metrics and relationship; determine the ideal number of vendors; mitigate risk when using vendors; and establish a vendor management organization that best fits the enterprise.
This enables organizations to optimally develop, manage and control vendor contracts, relationships and performance for the efficient delivery of contracted products and services. This can help clients meet business objectives, minimize potential business disruption, avoid deal and delivery failure, and ensure more-sustainable multisourcing, while driving the most value from their vendors.

Improve vendor negotiating position
Vendor negotiations are a key part of IT cost optimization strategies and can be challenging even in the most favorable economic conditions; however, today’s high levels of inflation make it even harder to tell if your vendors are tying price increases to their costs or are simply trying to maintain their margins.

Your negotiation strategy and playbook should include the following five activities:
No. 1 Understand the root cause of IT contract price hikes
Require your vendor sales teams to provide root cause cost details when renewal pricing is excessive and proposals appear overpriced. Don’t settle for vague explanations, such as “due to inflation/economic uncertainty/supply chain delays.” Require sufficient detail to explain or justify the fairness of unexpected increases that result in hefty budget overruns.

Build enough time into the process to engage vendors in fact-finding discussions for both new technology acquisitions and contract renewals.


No. 2 Leverage data points from economic indicators for IT contract cost modeling
Price and cost indexes such as the consumer price index (CPI), producer price index and employment cost index (ECI) are available from public sources. Monitor them to help you estimate vendor pricing and forecast future price changes. Building such data into your cost models also bolsters credibility in your negotiating position (see No. 3).

Download now: Framework to prioritize the top cost optimization initiatives for your IT function

No. 3 Include cost models in your negotiation playbook
Rigorous cost modeling that includes publicly available information can help you in negotiating a fair price increase.
Imagine an application maintenance service provider sends an annual renewal statement of work with an 18% increase in the maintenance and support fees, stating that the increase is due to labor shortages driving up internal staffing costs.
Your analysis, however, shows the local ECI rose just 4% in the prior year. Using this as a “should cost” model can help you counteroffer for a fairer renewal price.

No. 4 Tailor your negotiation playbook to be vendor- and deal-specific
Identify additional tactics that are vendor- and deal-specific to further improve your negotiating position.
You can, for example, time the negotiation to align with the vendor’s quarter- and/or fiscal-year end date or consider lower-cost alternatives, such as offshore providers with decreased labor rates. Perhaps incentivize your vendor sales team by letting them know that if your counteroffer is accepted, you would be open to evaluating an option for a multiyear deal.

No. 5 Ensure your negotiation playbook includes IT contract terms and conditions
Once you get a vendor to agree to your counteroffer, don’t sign too quickly. Every negotiation is an opportunity to capture concessions and improve terms and conditions. For the application maintenance service provider in No. 3, for example, you could cap future price increases to ensure you’re not back where you started in a year’s time, facing the same 18% (if not higher) renewal price increase.
Adding the right price protection language to your IT contract protects you when economic conditions are unfavorable — and it gives you a cost benefit when they return to normal.

In short:
Inflationary times add complexity when negotiating with vendors over pricing of IT contracts and renewals.
CIOs and their teams need a negotiation strategy and playbook to optimize deals and must insist on price transparency.
Use cost modeling to add rigor and power to your negotiating position as inflation hits IT contracts.