How do you negotiate with a supplier?

Below are seven tips to follow if you have a major agreement to renew with, for example, Microsoft, IBM, Adobe, or similar.

Good luck, and if you need help, just let us know!

1. Understand and analyse the propsal

- Review your current agreement: Go through the details of your existing agreement, focusing on current services, licenses, and any benefits you receive. Make sure you know exactly what has been delivered during the last agreement period.

- Evaluate usage and needs: Evaluate how much of the current services are actually being used. Investigate how effectively the software you have purchased is being used by employees and departments.

- Benchmarking: Compare your renewal price with other companies of similar size and industry (e.g., Gartner or your LAR). This can give you insight into whether their price increase is reasonable or not.

2. Definie your requirements

-Clarify your needs: What do you need from the supplier in the coming years? What additional features, services, or products would justify a price increase? Be clear about what you expect.

- Focus on value: List areas where you believe the supplier has not delivered value over the past five years (e.g., support, performance, features, etc.). Be prepared to discuss these points during the negotiation.

- Competitive alternatives: Explore alternatives to your provider's services, especially cloud offerings (Azure, Google Workspace, AWS, etc.). Having alternatives in mind can give you leverage during negotiations. Even if you don't plan to switch, knowing what competitors offer will help you understand your options.

- Hybrid solutions: If a complete transition away from a provider is too costly or disruptive, consider a hybrid solution (i.e., retaining some products but switching to alternatives for others). This can create leverage to negotiate better terms for your remaining services.

-Open communication: Schedule an early meeting with the supplier's sales team and express your concerns about the price increase. Be open about your concerns and the lack of added value.

- Ask for justification: Request a detailed explanation of why the increase is necessary. Are there any new features, tools, or improvements that justify the extra cost? If not, ask why they consider a price increase to be reasonable.

- Leverage volume and long-term commitments: Emphasize the size of your company and how important the relationship is. This gives you a strong negotiating position, especially if the supplier wants to retain a large customer.

- Seek discounts: Request a discount on the renewal price in exchange for a longer commitment or additional volume licensing. You may also request a multi-year renewal at a fixed price to avoid potential increases in the near future.

- Negotiate payment terms: If the price increase is non-negotiable, explore the possibility of restructuring the payment terms (e.g., spreading payments over several years).

- Demand transparency: Request transparency regarding their price increases, such as a clear breakdown of what drives the cost, and explore opportunities to customize the agreement to suit your specific needs without paying for unnecessary features.

- Factors other than price: Consider asking for concessions other than price, such as consistent support, more training resources, customized solutions, or other value-added services that would make the cost increase more acceptable.

6. Get ready to go (BATNA - Best Alternative to a Negotiated Agreement)

- Know your bottom line: Identify the maximum price increase you are willing to accept. Be clear about the compromises you are prepared to make and where you will walk away if the supplier cannot meet your terms.

- Have a backup plan: If negotiations fail, be ready to implement your alternative plan (whether that means switching to another supplier, adopting hybrid solutions, or renegotiating with the supplier in a future agreement).

- Get everything in writing: Ensure that all terms, agreements, and any negotiations are documented, including any agreed discounts, customized services, or future service levels.

8. Summary

In brief, the work can be divided as follows:

Week 1-2:

• Collect data on current usage, performance, and value obtained in the past.
• Investigate alternatives to the supplier (competitors, hybrid models).
• Define your most important requirements and potential compromises.

Week 2-4:

• Initiate discussions with the supplier, raise the issue of the price increase and ask for an explanation.

• Identify areas where they have not delivered on their promises or where you are not getting enough value.
• Start exploring possible non-price-related concessions (support, features, etc.).

Week 4-6:

• Present your counteroffer or alternatives (multi-year agreement, discounts, payment terms, etc.).
• Finalize if possible and try to clarify the final terms.
• Document all agreements.

By structuring the negotiation with clear goals and leveraging the size and needs of your organization, you can manage the cost increase and possibly get better terms.