Renegotiating the IT buyers market

EVER SINCE THE economy plunged into recession, analysts have pointed to one bright side for IT buyers: a climate ripe for negotiating better prices and added value from service providers. With vendors still crunched for business and likely to remain so in early 2003, the window for leveraging that buying power remains open, CTOs say.

“It’s still a buyer’s market. We’re not seeing resistance from the vendors,” says Jim Korcykoski, vice president and CTO of Western & Southern Financial Group, a Cincinnati-based financial services organization with a $40 million annual IT budget. He expects this to continue at least through the first quarter of 2003, possibly through the third.

Analyst Andy Efstathiou agrees with that timeframe. He predicts that services vendors will continue to face a customer drought and will remain eager to negotiate for at least six more months.

“I would say the only sense in which the window has narrowed at all is that the vendors are looking toward what will be their growth opportunities by industry,” says Efstathiou, program manager of technology management strategies at The Yankee Group in Boston. “Government, pharmaceuticals, and financial services have become hotter; so to the extent that the vendors are focusing on these industries, others may be getting a little less attention.”

Striking while the market is hot

Western & Southern’s Korcykoski has taken advantage of market dynamics and has used his buying power to drive down contract prices and boost service levels. “We have had a lot of services contracts which have come due in the last 18 months,” says Korcykoski, who outsources several of his company’s public Web sites and tasks such as advanced desktop management and repairs, disaster recovery, and database administration and monitoring. “In most cases, the vendors have been willing to work with us pretty aggressively to keep the business.”

As contracts expire, nearly every vendor has been “very aggressive” on pricing, Korcykoski says — with a handful of notable exceptions. “The biggest thing in my mind hasn’t been who has negotiated, it’s who hasn’t. The disaster-recovery business has been brisk, so they’ve not been willing to work on price as most of the others have,” he says.

Where vendors are competing and sweetening deals are on service levels, says Richard Hartt, CTO of Pension Benefit Guaranty Corp. (PBGC), a Washington-based federal pension insurance agency. PBGC is anticiapting an IT budget of $54 million for this fiscal year. “The new news is that service levels are a factor,” he says. “There are heightened expectations and heightened levels of service.”

Hartt is currently in the bidding phase of negotiating a new contract for outsourced computer-center operations. His expectations for the new contract include “clearly delineated” service levels that go beyond simple uptime clauses.

“We want to clearly define the roles and responsibilities, the rules of engagement. What do you do when something goes wrong? How do you react to a change in circumstances? That’s now an element of negotiation,” Hartt says. “You know over a three-to five-year outsourcing agreement things are going to change. We’re now putting in ground rules on how to deal with those things.”

Vendors are now willing to meet customers on such contractual demands, says Myles Trachtenberg, CTO of IntraLinks, a New York-based company that sells online collaboration technology. Among the services IntraLinks outsources are application hosting, some application development work, and datacenter management.

“I’ve seen a greater level of flexibility and a big focus on customer retention,” says Trachtenberg, who has been targeting onerous exit clauses. “[Vendors] aren’t in a position to keep you there because of a contract. They need to keep you because you’re a happy customer.”

Vendor push-backs and cutbacks

With vendors potentially facing yet another year of slow growth and customers with lists of new demands, a push-back from strapped sellers may arise. But that will be limited, Yankee’s Efstathiou says. “I think you’re really only seeing that type of push-back where the contract requires an up-front investment by the vendor.”

As an example, he cites Proctor & Gamble’s recent scrapping of a multibillion-dollar outsourcing deal it had been negotiating with EDS. “The problem is the investment required up-front is a severe drag on the vendor’s resources; so any of the types of outsourcing that require up-front investment on the part of the vendor, whether they want to push-back or not, they may not have a choice,” Efstathiou says.

Negotiating safeguards

But with competition fierce, many vendors are being forced to cut back, and staffing is often the link that suffers. PBGC’s Hartt and Western & Southern’s Korcykoski both say they’ve felt the pinch as vendors trim their headcount and lose experienced employees. “I’d characterize it as a learning experience for us as buyers,” Hartt says.

Recent industry consolidations have Korcykoski experimenting with contractual clauses allowing for cancellation in the event of a merger or acquisition. He also investigated using a vendor-bankruptcy exit clause — Korcykoski felt the aftershocks when WorldCom toppled — but he dropped the idea because of potential legal challenges.

Still, such concerns don’t outweigh the advantages of the buyer’s market, Korcykoski says. In service industries with continually dropping prices — he draws a comparison to the market for mobile-phone service contracts — costs have shifted down dramatically in the past year, he says. In some cases, contracts that will normally drop by 2 percent to 5 percent during a renewal have plunged 10 percent to 15 percent. “We got more movement by a fair amount, not just a point or two,” he says.

One market where buyers say they’re seeing particularly strong price pressure is the outsourced application-development field. The use of less expensive labor forces outside the United States, such as programming teams in India, has fundamentally altered pricing in that market, Hartt says. He has not yet explored using overseas labor for the small development projects his agency outsources, largely because strict federal regulations may prohibit it, he says.

But IntraLinks’ Trachtenberg is unfettered by such restrictions. He is currently evaluating proposals for an API development project his company is outsourcing and says he will almost certainly choose among bids that include a mix of onshore and offshore labor because of the model’s cost savings.

Because some U.S.-based staff and managerial resources are needed for such development projects, there’s a floor to how low prices can go, but the industry still has a ways to go before hitting it, Yankee’s Efstathiou says. He expects the services market for application development to remain one of the most competitive in the near term.

For now, the balance of power between CTOs and their service providers remains firmly on the buyer’s side. “A lot of folks have come and knocked on our door,” Trachtenberg notes. “About a year ago, I began receiving many more cold calls from vendors looking for business, and the stream hasn’t let up.”