Tips for renegotiating your tech vendor contracts

Right now, you may be looking at all of your costs. If you’re not, you should be. Those costs – sometimes a very significant part – may include the technology you use to run your business or to provide a benefit to your agents.

Having been on both sides of this aisle as a vendor and a customer, I can provide you with a unique perspective on how to approach this process. For starters, you should always begin the process by gathering facts, as contract negotiations are not a great place for emotions and feelings. The facts you need here in particular are really pretty simple:

  • What does my stable of tech products or services look like?
  • How much am I paying overall for each product or service?
  • What are the details of my contracts (term, renewal deadline, minimums, etc.)?
  • How many active users do I have for each product or service?
  • What business value is being driven by each product or service?

What does your stable look like?

Doing an annual audit of your tech spend is the best way to keep ahead of these things. I’m never surprised to find that there’s an auto-payment going to a credit card for a product you don’t remember.

Take stock in all of the tech vendors you work with, and not just for negotiation purposes. In
many cases you’ll find that you’re sending data to companies but have no idea what they’re doing with it. Or, you may find that you’re paying thousands of dollars for something you can’t remember signing up for.

Know your entire tech stack, and I don’t mean just real estate technology. I mean email, hosting, productivity, eSignature, document management, communications — everything. Try your best to categorize everything, as you may find that you have multiple providers for the same service. Your accounting or accounts payable team is a great place to start.

Now that you know the landscape, you need to attach the costs.

How much are you paying?

Start off by determining what the total expected cost from the contract is. Some
services you won’t have formal contracts for, just license agreements. And chances are
you weren’t the one who signed up for them.

From there, look at what you have been paying for the past few years (it’s important to look at the trend). What does it amount to as a percentage of your overall costs? Where does it rank in terms of your overall costs?

It’s shocking when I help someone walk through this exercise and they gasp at how much they’re paying for a particular product. I’m paying $1,700 a month for eFax

As you collect this information, combine it with your tech audit so you know what the contract
price was and what you’re currently paying. This will also help you rank the various providers by cost.

What are your contract terms?

As you go through this process, you’ll find a variety of contracts, order forms and license
agreements. Some are going to be more formal than others, but it’s crucial to understand the terms across the board.

For example, is this a month-to-month agreement that you can cancel at any time? Is this a
multi-year agreement that you have three more years to go on? Are there expected monthly
minimums that you need to meet? Are there annual increases built in? What are the penalties for cancellation?

Between the costs and the contract terms, you’re going to start developing a picture of priorities based on spend vs. likelihood of renegotiation. But you’re also going to find out how well your contracts are negotiated.

Make sure you gather all the contracts or pointers to license agreements, terms and
conditions, privacy policies, etc. Much of this stuff lives in email inboxes, or worse, no place at all. Get in the habit of organizing it all in one place, even if that’s a spreadsheet.

How many active users do you have?

This is where the fun starts. While it may be shocking to see how much you’re paying for
a particular product or service, it’ gets more’s more shocking to see the actual total cost-per-user.

For example, I’ve seen incidents where fewer than a hundred (out of thousands of licensed users) were actively using a product, rendering the effective cost-per-user about 30 times the theoretical per-user price.

Many vendors will provide you with active user counts, but any product or service you license
should also allow the administrator to determine this. By “active” I don’t mean
someone logged in and spent three seconds in the system reading an announcement. Active users should be logging into the system multiple times per month and logging an average time in hours over the month.

Of course, there are exceptions to this rule, such as products that automate work and don’t require much intervention. In those cases, look at system activity on behalf of those users.

It’s common that fewer than 20% of agents are using a product that you’re paying for across the board for all agents. With staff systems, it’s not usually as stark, but that’s also not typically where the bulk of your costs come from.

What business value is being driven?

The final step in your fact gathering is to identify the business value of the product or service.
It may in some cases be more difficult to identify, but you can at least
determine whether it’s helping to generate revenue, reduce time and cost, reduce risk or provide a unique experience that sets your business apart.

Ask yourself: if we didn’t have this would we still generate the same GCI? Can you determine that without a specific system, you would need more people to produce the same outcomes? If you didn’t have that specific solution, would your business be at risk? Is this product setting you apart in a measurable way from your competition?

These are exercises you went through (or should have) when you started with a specific vendor or product. But it’s always a healthy to examine at what you expected vs. what you can actually measure.

It’s time for renegotiation

A few things before diving into how to negotiate. It’s important to know that most of your
providers do not want to lose you as a customer. A customer who pays less is more
beneficial than an ex-customer. It’s also important to realize that businesses have costs and profitability to worry about, too. At the end of the day, it’s always about business, which is why it’s so crucial to have the facts.

Let’s say you have a contract in which you’re paying for a product for all of your agents. Everyone was trained, every agent got their login, and every new agent was added to the product as they onboarded. As you looked at the trend over the past few years, you notice that of your 200 agents, about 110 are actively using it.

And let’s say that your contracted price per agent (for all agents) was $12 per agent per month. Based on actual users, however, you’re paying $22 per agent per month, or 82% more than you expected.

Now, let’s say that you quantified this and know that this product does, in fact, help drive real
revenue. Each agent who uses it has 25% more production than those who don’t.

I would approach this situation with a stick and a carrot (yes, in that order). First, the stick is that you expected to be paying $12 per user per month, and you’re way beyond that in actual cost based on adoption.

However (carrot), you believe in the product and don’t want to cancel it. So, you want to renegotiate a rational cost-per-user that’s more than $12 and less than $22 on an active user basis and then work with your vendor to help improve adoption because you know it’s in everyone’s best interest. You throw in a case study with that vendor and it’s a win-win.

In instances like this, I’d rather negotiate the cost up for active agents than down for all agents since you’re never getting 100% adoption. If you boosted adoption from the
current 55% in this case to 70% (140 agents) you’re still paying below the expected monthly
cost of $2,400 — and you have a runway to get there. This sort of negotiation can easily shave thousands of dollars off your annual costs.

There are many ways to renegotiate contracts to more favorable terms that are fair to both
parties. If you’re growing, make sure you discuss volume discounts where the more users you have the lower the price per user. Don’t get locked into escalating price schedules if you can avoid it. And don’t lock yourself into multi-year agreements with auto-renewals if you’re not going to police your contracts.

Also, look for products that have a pricing structure that’s based on success. For example, rather than paying per agent, pay per transaction or another measure directly tied to revenue.

As I said, this is business, and it’s not about how you extract blood from a stone. It’s about
finding a fair compromise that both parties can live and flourish with.

And right now, everyone should be looking at how they can right-size their spend to get through this latest cycle and come out the other side stronger and better for it.

Scott Petronis is founder and principal at Xcentric Consulting, LLC, where he helps organizations to uncover and solve technology challenges.