Negotiate Better Deals With Software, Hardware, and Service Vendors
One of the most over-looked and under-executed tasks that is necessary in growing a Managed Services company is cost control. The bottom line is, this industry is competitive and thus you have to price your service for competition. Instead of flipping the lobby couch cushions for loose change, you should look to your vendors to help increase profit. If your biggest competitor is undercutting your pricing, then there is a chance they are getting a better deal on services. This could be because they are selling a higher volume or it could be simply because they negotiated. Either way, if you aren’t constantly asking your vendors to give you the best price then you may be putting your company at a disadvantage.
When our Managed Services company embarked on a hard push to grow our margins, we audited every daily, weekly, monthly, quarterly and annual expense on our books to find areas of improvement. I contacted each vendor and told them that due to competition in our local market, it no longer makes business sense to use and/or sell their service and thus we need to lower our cost or possibly transition to a competitor.
If you have a good relationship with your Channel Account Reps than this conversation might be difficult, but I can assure you it is necessary. If they are thinking about earning your business long-term and not the hit they might take on short-term sales commissions then they will be willing to play ball. This is why it is equally important to honor your loyalty to your vendor partners when it is earned in situations such as this.
As I began calling and emailing our vendors, I quickly began to realize the best angles to attempt to lower our cost. Here are a few of the things I learned and the processes I took to lower our cost.
Ask For Their Newest Promotion
One of the most common reasons you will find for cost increase of products and services is the expiration of a promotional rate. When you first engaged with a vendor and they wanted to earn your “net new” business they likely offered you the best rate possible. If your contract is annual as most are, it will either auto-renew for another year or you will be “out of contract” and the term will be month-to-month. Knowing this is important, as it makes a difference in the amount of leverage you have in the situation.
If you are month-to-month with your services then your vendor will benefit from having you renew your annual contract and will most likely offer you a promotional rate to do so. This might only be the equivalent of your last promotional rate, but it is better than getting the automatic rate increase that is likely penciled into your contract. No matter what, there is always a promotional rate that these companies are willing to offer to new customers. They have no reason to give this to you unless you ask for it, so it is important to do so as often as your contract renews. The worst thing that could happen is that they just say “no.”
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Audit Quantities For Price Breaks
In Managed Services you deal with a constant flow of adds and deletes. If you do not have a documented business process for what to do in this situation, it can lead to major financial implications down the line. We were a prime example of this when we found out that one of our vendor contracts had a clause that would allow us to add licenses any time but could never remove them. Since we had a user retention policy, this meant that we ended up with almost double the amount licenses needed, thus doubling our cost. While this was an extreme case that we were able to negotiate out of, it is a good example of why it is important to always stay on top of your license counts and contracts.
In some cases you might find that carrying additional licenses can work in your benefit. If your vendor offers different pricing tiers based on volume, it is important to know where you stand in your current tier and calculate whether or not there may be instant savings in adding the amount of licenses necessary to get to the next price break. We found this to be true with our white-label VoIP service, which we decided to upgrade ourselves to the highest tier, taking a short-term hit that ultimately doubled our profit margin in the long term. This was one of the best decisions we made as it relates to that department of the business.
Check Billing Frequency Discounts
One of the easiest ways to get a discount on your service is to change the frequency in which you pay. If you pay your bill on a monthly basis, it would be worth it to ask your vendor what discounts they offer for quarterly or annual billing. You may take a cash flow hit paying more upfront. This is why it is important to measure out the risk versus the reward before agreeing to terms. If the savings is not significant then it may not be worth parting with your cash before you have to.
When our company looked to negotiate our vendor contracts we ended up switching almost all of our contracts to quarterly billing. When you have the credit and/or cash flow to do this successfully without stretching yourself, it can make a significant impact on your profit margin. After a few months of operating at a better margin, your cash flow begins to improve and you get to realize the benefit. Getting through the first quarter is the hardest part, but from there you can enjoy the benefits of a better rate long-term.
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Shop Indirect / Partner Resellers
One of the most counter-intuitive, but successful ways that we were able to lower our contract rates was by purchasing the same service, but through an indirect channel. Yes, that is correct, contrary to the retail industry, buying direct in technology sometimes is more costly than buying from a re-seller. This is because the technology provider needs its indirect sellers to reach certain markets so they don’t want to undercut their pricing.
We found this to be the case when our promotion expired for the Anti-spam product we were offering and the company simply would not negotiate a better deal. They ultimately referred us to Ingram Micro (who we already used to purchase other services) and let us know that they could give us the price we were looking for buying it indirect. The switch was simple and we never had to redeploy or make any change to our licenses. We simply just paid someone else each quarter for the service for significantly less than buying direct from the software company.
Get A Quote From Competing Product
When all else fails, if you simply cannot get your vendor to budge and their current pricing is not sustainable, then it can be beneficial to get a quote from a competitor. This is the “hardball” approach and should be used with restraint, as it might put stress on the vendor relationship. If there is no long-term benefit to your loyalty and no difference in quality of service, then this is always the most effective way to get the price you want.
In our negotiations, we had to pull competitor’s quote on a few occasions and were successful in getting the price matched or beaten in the vast majority of cases. The tricky part about this maneuver is that you can only really do it once when all else fails. If you keep going back to your vendor year after year with competitor quotes then you are not likely to be looked at as a loyal customer and there is little incentive for the vendor to keep your business.
If you want to successfully grow your Managed IT company, than you need to have a plan and appoint a member of your team to manage cost control. If you do not take an active approach, your vendors will likely continue to increase rates as far as they can until they get push back. If you are not willing to put in the work to get the best price, another MSP will, giving them an immediate upper hand in your market.