Lessons Learnt From Contracting and Negotiating Large Software and Hardware Deals

Kwang Leh Wong, Head of IT Strategy and Enterprise Architecture, RHB Banking Group

Kwang Leh Wong, Head of IT Strategy and Enterprise Architecture, RHB Banking Group

In the age of digitization, IT is becoming a significant component of an organization’s total operating cost. Annual renewals of software licenses and hardware maintenance have been done with little success in cost reduction as these renewals typically come with contractual inflation adjustment and are based on the rising USD. At the same time, new purchases of software, hardware, and services have also been done in a piecemeal manner resulting in dilution of bargaining power with vendors.

To address these challenges we identified top-tier vendors with whom we entered into strategic multi-year contract arrangement consisting of software license and hardware maintenance renewals as well as new software and hardware purchases aggregated across various businesses within the group.

In such multi-year deals, the vendors would encourage clients to include as many new purchases as possible in order to maximize the potential discount not only to the new purchases but potentially also the renewals. This is where the risk of including yet-to-be-approved investments arises. When such investments fail to be approved, the organization could end up with software and hardware that are sitting idle in the data center not delivering any value to the business yet adding to the overall IT operating cost.

What goes into the substitution list and the terms of substitution is where the contract manager plays a key role in coordinating and negotiating

Such risks can be mitigated by including into the contract flexibility to substitute the unused software or hardware with other software and hardware that may later be useful to the business.

What goes into the substitution list and the terms of substitution is where the contract manager plays a key role in coordinating and negotiating.

Also to watch out for is the bundling of unnecessary software or hardware components into the Bill of Material (BOM). These components are often overlooked when the IT and contract managers are drowned in pages after pages of contractual documents and BOM. They tend to be included under the guise of an “Enterprise Edition” offering when all the organization needs is the “Standard Edition” that is rid of the “extras.” The contract manager needs to work closely with the IT managers to drive out the unnecessary components in order to bring the cost down.

To do this successfully will require time to be on the contract manager’s side. The contract manager must, therefore, ensure that the contract process starts early so as to allow sufficient time for all parties involved (IT, business, legal and finance) to conduct thorough review and negotiation of what could be a highly complex deal.

The additional time afforded from starting early can also be used with external specialists who may have deep insights into the way the vendor package and license its products. This can prove to be very useful when structuring and negotiating the deal.

The insights obtained externally can be further enhanced with internal historical information an organization keeps on its purchases with its vendors. This is where an organization must have a good system of record that facilitates greater analysis and insights into its purchasing history.

Finally, such deals will only be successful with a mindset change from the IT managers who often leave contract terms and financial cost as an afterthought while prioritizing the technical aspects of IT delivery. The IT managers must begin to accept effective contract management as a key part to delivering cost-effective IT services to the business. The inclusion of the necessary performance management factors will help towards creating this mindset and behavioral change.