Summary
- Fragmented contracts can build up gradually, often one project or acquisition at a time.
- Hidden costs, such as unused licenses and lost volume discounts, can result in original equipment manufacturer (OEM) prices that drive up your contract renewal costs.
- Mapping contracts to actual usage helps reduce contract sprawl, especially with a co-term renewal date in place.
- A complete view of contracts and usage creates a stronger negotiating position at renewal.
- Ongoing governance, backed by lifecycle services expertise, keeps OEM sticker shock from coming back.
Many information technology and finance leaders are surprised by unexpected contract renewal costs. Maybe you paid a set amount 12 or 36 months ago, but then it’s time for renewal, OEM prices jump, and budget issues arise: The new number is not in your budget.
This issue often traces back to years of fragmented purchasing and contract sprawl, which can cost you volume discounts and make renewals more challenging to negotiate. Fortunately, you can get (and keep) your contract renewal costs under control, and that often starts with right-sizing your software and support contracts, which also creates significant operational and financial efficiencies beyond just the renewal.
How contract sprawl occurs and the financial implications
A common cause for contract sprawl is the result of not having a co-terminous date for your contracts. This is a shared end date across all your support and software contracts. Without it, each purchase has its own start and end date, adding operational complexity and failure to capitalize on economies of scale.
A perfect example is buying new technology or conducting a one-off project with support attached. You may have recently renewed all your maintenance and software for the next 12 months, but the new purchase brings a new contract expiration date. Now, you have a mix of contract expirations, making it harder to negotiate and purchase strategically.
A couple of other situations tied to fragmentation include:
- Mergers and acquisitions. When your company goes through a merger or acquisition, you might bring an entirely new set of support and software contracts into the fold, each with its own end date.
- Lack of global shared policy. Various business units or departments may procure on their own without a policy driving a co-term date, and you end up with a proliferation of contracts.
These types of issues usually surface in one of two ways. The first, and more alarming, is when your team goes to access support and realizes a contract has expired, causing downtime. The second is at the renewal event itself, when you recognize what you have under support versus what you need going forward. That process exposes disorganization in contract management, and it’s where hidden costs often surface.
The hidden costs lurking at renewal
Additional optimization elements to consider:
- Volume discounts. If you’ve been procuring support a la carte, you are likely not realizing the best discounts available. For example, consolidating your purchases might mean negotiating a $1 million spend instead of a $100,000 spend, along with the discounts that type of purchasing power brings. Fragmentation can also keep you from enterprise agreements and other OEM programs that provide additional financial and operational benefits.
- Support costs that grow with the business. As you grow, your infrastructure needs will likely grow as well, along with support costs. For example, if your install base is 25% greater than your last renewal, your support costs can similarly increase. The compounding efficiencies of ensuring your contracts are optimized can be significant in a growing environment.
- Refreshes and end-of-life surprises. Delayed refreshes and surprise end-of-life costs also create challenges. During renewal, you might learn that certain technologies are no longer supported. Now you require a refresh, which may or may not be in the budget. Without a plan, you end up making those replacement decisions on tighter timelines, with fewer, and possibly more expensive, options.
When you can see what’s currently in your environment, what’s covered, and what’s coming due, cost control gets much easier.
Strategies to wrangle your contract sprawl
Consolidating your agreements makes it easier to spot cost savings and simplify operations. If you’re just getting started, I’d recommend:
- Inventory your assets and contracts, then map them to actual usage.
- Align your renewal dates by establishing a co-term date for any new and renewed items.
- Consolidate contracts into an enterprise agreement, which has many benefits that change how you purchase and consume technology.
For Cisco customers, programs like True Forward and Value Shift provide even more flexibility by deferring some software and support costs until the anniversary date and moving value from older products to new ones as your environment changes.
Savings opportunities can also show up throughout the contract term if you have clear visibility of your environment and support status. That visibility also strengthens your position at renewal time. Operationally, asset management tools like GDTamp give your team a single place to view assets, support status, and renewal exposure.
Where does a lifecycle partner fit?
A technology provider with lifecycle services expertise can help you keep up with changing OEM buying programs and reach the optimal support state. At GDT, our lifecycle services specialists help our customers stay right-sized.
Solutions like GDTamp provide visibility into contracts and install base, and our pre- and post-renewal processes help you capture the financial and operational benefits of how you consume technology. After consolidation, ongoing governance also keeps OEM sticker shock from returning.
When building the plan, we suggest gathering:
- A current inventory of your assets and software
- Contract and renewal data
- Support coverage details
- End-of-support dates
- Maintenance and refresh history
Once that data is in place, the first wins can come quickly. You get a clear understanding of what’s being used, where support gaps exist, and where contracts are fragmented. As a result, you can turn that visibility into the foundation for your strategy.
If OEM sticker shock is catching you off guard, talk with a GDT expert, or learn more about how IT lifecycle services reduce cost and complexity.
