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Inflation is impacting how IT procurement groups must handle new and existing contracts. The jump in the Consumer Price Index, a broad basket of goods and services, is showing no signs of decreasing. Inflation accelerated across the U.S. in May, jumping to 8.6% — the steepest increase since 1981, according to the US Bureau of Labor Statistics (BLS). In April, the CPI rose at an 8.3% annual rate, defying hopes that inflation had peaked. Economists had forecast that the CPI rose 8.2% in May, according to FactSet. As a result, IT procurement personnel need a strategy to how best to identify those contracts that pose the most risk to the organization and how to minimize the impact of price increases. Below are a few strategies to consider following an effort to minimize the impact of inflation:
1. Identify Which Contracts Pose the Most Risk
Contracts with the highest risk profile typically have the following elements in common:
No type of price protection clause for subsequent term renewals
Solely pegged to an index with no other price increase protections
Are based on annual renewal
Professional Service contracts without rate cards
We typically see these types of agreement in the following service / category areas:
Subscription-based services (Software as a Service, Platform as a Service, Infrastructure as a Service)
Co-terminus software maintenance and support contracts for on-premise licenses
Managed or outsourced services (helpdesk, application support) with annual cost of living adjustments (COLAs)
2. Prioritize Contracts with the Most Risk
Once you’ve identified those contracts that pose the most risk to the organization in terms of inflation vulnerability, it’s important to prioritize them. Priority typically is based on these characteristics:
Renewal cycle (is the contract due for renewal this year?)
Spend (prioritize highest to lowest)
Criticality to the business
Once contracts have been identified and prioritized, we would recommend the following negotiation options:
Negotiate longer terms. Annual contracts are risky now due to the severe yearly increases in inflation. Look to negotiate renewal terms greater than one year and leverage a longer contract term for discounts or more favorable price adjustment clauses at the end of the term.
Itemize maintenance and support renewals. If you’ve co-terminated multiple software maintenance and support renewals, then look to negotiate at the line-item level. Older, more stable software titles should require less of an inflationary uplift than newer, less stable software titles. The net overall effect should be to lessen the inflationary increases by selectively applying higher and lower uplifts.
Stagger the increases. As an alternative to a longer term or an itemized approach, stagger the price increase over time. As an example, stagger a 10% increase over two years, each year with a more palatable 5% increase in costs. Cap these increases at the nominal value and do not agree to tie pricing to an index.
Negotiate improved price protection. For new contracts such as “as a Service” contracts, negotiate price protections for subsequent renewals. We would recommend 3% to 5% or annual change in Consumer Price Index For All Urban Consumers, whichever is the lesser. This mechanism provides protection from drastic inflationary upward price changes in future renewals.
Leverage supplier month/quarter/year end. If possible, leverage end of month, end of quarter and end of year deadlines where suppliers tend to be more open and willing to make deals.
Supplier transparency. Ask suppliers to show you proof of why they are asking for increases (besides CPI-U changes). For hardware, ask them to show written proof that they are taking on price increases from component manufacturers. For software, ask them for proof in terms of people or technology increases and adjustments. It’s more appropriate to apply adjustments to a supplier’s true input costs than to apply an adjustment to a total price.
Get creative. Is there something you are willing to trade instead of the price increase? Perhaps reference calls or a speaking at the vendor’s next conference could be a way to barter opportunity. Think out of the box as to what you as the customer could give the supplier instead of incurring the price increases.
Keep up to date with Economic Indicators. Reference the CPI, ECI (Employment Cost Index), and PPI (Producer Price Index) in all your negotiations.
4. Proactively communicate the potential impact of these increases
The potential is high to see alarming price increases in today’s market, so be sure to communicate to all leadership the forecasted increases for budgeting purposes. Executive management won’t want to be caught off guard, so it’s best to arm yourself with the data and present realistic scenarios. Additionally, you may need executives to step into some of the negotiations with strategic suppliers.
Rising inflationary pressures are forcing enterprises, IT procurement teams, and practitioners across other procurement categories to become more strategic in how price adjustments are approached and negotiated. By applying a thoughtful and innovative mindset to this environment, procurement teams can minimize the impact of inflation now and into the future.
Reach out to us today to discuss how we can help support these negotiations!
We invite you to join in the discussion on LinkedIn to share your thoughts, and let’s keep the conversation going!
Global IT Category Manager
Jeffrey Gaguzis is a global IT category manager for WNS Denali. Jeff has over 20 years in Sourcing and Procurement with over 15 years focused on the IT category. Before joining WNS, Jeff worked for Fairmarkit, a pioneer in tail spend management technology. Prior to that, Jeff held similar senior positions at Accenture, TD Ameritrade, and FreeMarkets/Ariba. Jeff holds a BS in Microbiology from Penn State and an MBA in Marketing/General Business from Robert Morris University.
Global IT Category Manager
Sara Alchin is a global IT category manager for WNS Denali. Sara has over 20 years in Procurement plus 10 years in various IT roles. Sara has previously worked with companies focusing on IT software procurement, hardware asset management and supplier management. Sara has a BSE in Computer Engineering from University of Michigan.