Telecom & Technology Consulting
In the quest to simplify operations, CIOs often reduce their roster of vendors. It’s a smart, cost-cutting strategy – that is, in theory. Because if you can’t say goodbye without ramifications, whatever you may have saved will disappear when you have to renew the contract.
CIOs fall into the vendor consolidation trap, in large part, due to how they perceive the changes: Fewer vendors means simpler architecture, which leads to more favorable pricing and less people to manage. Sounds great. You’ll spend less while reducing day-to-day stress. What CIO doesn’t want that?
The problem is that there’s a cost to consolidation – one tech leaders may not be aware of until it’s time to revisit the vendor relationship. It works like this: You see significant savings after year one, then even more after year two. But then when it’s time to renew, the remaining vendor increases their fees, which eliminates or significantly erodes the savings you enjoyed for a few years.
The result is counter-intuitive. Whereas having multiple vendors keeps pressure on them to remain competitive with each other, consolidation provides the surviving vendor with more leverage with pricing, as well as with terms going forward.
That’s because surviving vendors understand that you’re now, to a degree, a captive to their services. Not renewing would be extremely costly. Reducing the amount of vendors on your roster may seem simple, but replacing a valuable partner within a tight timeframe can take considerable effort – and luck.
Every CIO has to ask themselves if they can walk away from a given vendor at the renewal stage. With potentially twelve months of migration work involved from switching to a new vendor, the answer is usually a big, resounding “no.” If you actually answer “yes”, the vendor will most likely adjust their fee to continue the relationship.
Much of the false confidence in consolidation can be avoided by carefully reviewing contract language. For example, many multi-year agreements include price increase caps that appear, on the surface, favorable. The issue is that those caps are typically written for solutions (both products and services) in their present configuration at the time of signing the deal. What often occurs is that vendors will repackage functionality into higher-priced packages. As such, the vendor ends up charging more at renewal than what was originally negotiated. Simply put, you pay more for less.
What we see from the aforementioned, distilled to its essence, is a lack of leverage on the part of the CIO. Yet these tech leaders can control leverage when they retain at least one warm alternative vendor in every category they consolidate. The key, of course, is defining the term “warm.” Rather than merely a vendor name on a list in a Google document, a warm alternative is one with which you have an established relationship with the potential vendor. You’ve seen a proof of concept and have tested their platform.
Also keep in mind the cost that’s actually significant to your CFO. Typically, a consolidation program is measured by the savings projected in the first year. But what matters most to financial leaders is the savings amount in three years, which is measured against the original promised savings amount. That is really the number that consolidation often overlooks upon completion of the full renewal cycle. Most important, this number is the true test of whether the program worked as intended.
Due to turnover, many CIOs inherit a consolidation problem from the previous team. If that’s your situation, the quickest route to a valid negotiating position isn’t to attempt to gain leverage everywhere at the same time. Instead, choose one category where a credible alternative can be implemented fast, and then rebuild it within one year. Don’t go big – try a proof of concept in a smaller category, which improves your negotiating position more than a partially built case for a larger aspect.
“Best practice” is a wise guiding principle. However, with vendor consolidation, it can be beneficial to take an off-the-beaten-path approach. When you carefully assess the ramifications of your vendor decisions, you’ll have an easier way to manage partners while truly achieving the cost savings you have in mind.
