Effect of slowdown

The contract was signed at a time when growth was good and business expectations were stratospheric across industries. The then CEO was exploring local expansion as well as captive services for global operations that would have given Indian entity a firm standing. The downturn took everything away including the CEO. Business growth did not revert despite the economy stabilizing. The pressure to turn around the business thus became paramount for this IT company.

As the negotiations stretched over a few days, the CEO began demonstrating discomfort. In an open book costing he was justified in his pricing but unable to acknowledge that the company had built up higher running cost which could do with pruning. As the customer, my CIO friend was unwilling to pay a substantial increase to accommodate. The choice to the vendor was to cut costs in a hurry and acquire new customers, and to the CIO it was about continuity or moving to another vendor.

The negotiation process

Companies set up specialist functions to negotiate deals, sometimes within Finance and at times as an independent charge or within the function equipped with experts who justify their existence with great sounding deals. Some of these may be win-win, but many end up bickering over legal contract terms or lose-lose unless you are an 800 pound gorilla whom nobody can ignore. So how does one define the limit for negotiation? How do we know that the deal is great for both of us and not a win-lose or lose-win?

Conventional way is to negotiate hard, drive a bargain that is best value for the customer. It does not matter if the supplier makes money or not; they can always recoup their margin in the next deal or with other customers. This belief has survived and done well for many. Suppliers recognize it and so do customers who play the game. The industry has adjusted prices accordingly so that nothing sells for full price anymore. Everything has percentage off going all the way to 90%. Can we get it free?

The dance of the discounts?

There is a need to change some of these paradigms to bring the dance of the discount to a stop or at least reduce it to realistic levels, may be linked to volume of business. CIOs too need to set fair expectations internally and externally to create win-win scenarios and work upon long-term relationship building. Rarely any deal now is tactical. It is also important to remember that people churn across companies. The spurned, scorned or bitter salesperson may turn up a few years later in another company which is critical to your business operations.

People buy from people, so don’t squeeze the lemon too hard, you may end up with a bitter taste.

P.S. my CIO friend concluded the contract with the vendor who did reduce his overhead costs.

Evolution of cloud

Over the last couple of years, every offering saw two shifts: first it had to have a cloud flavor and second around social networking (that is another story). Some termed this new euphoria as bubble 2.0 tinted by valuations achieved in recent IPOs. So everyone justified how this time it is different and why it is sustainable. Many large and small enterprises found efficiencies, at least short term, in shifting field functions like sales and service and collaboration on the move to the cloud.

Leaving aside the debate between public, hybrid, and private clouds, the real issue is about the promise of the cloud, irrespective of the vendor, the type of cloud offering, or the engagement model. The big benefit that every type of cloud offered was savings, real quantifiable savings, or better, total cost of ownership. CFOs would agree that TCO is always a good measure for any financial model if all other dimensions remain unchanged.

Cloud service providers’ financial models are contingent on multiple customers adopting their base-solutions which give them the efficiency of scale and repeatability. As the number increases beyond a threshold, they start making money. Non-concurrency improves yields, but prices remain the same for customers. So the financial models attempted to capture some efficiency-based gains, making them look attractive to the prospects.

A few unanswered questions

Most discussions got off to a good start with worksheets providing easy decisions. The newness of the paradigm left some questions unanswered, but during the slowdown, these were brushed aside. Some of these were:

a) What happens if the SLA is not met?
b) Is my data as secure as it is in my current state?
c) Can I move off to another cloud if I don’t like something? How easy is the transition going to be?
d) As I upgrade the internal systems, how do I ensure that their integration with the external systems does not break?
e) What recourse do I have if the cloud service provider goes bust?
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I will stop here, the list is a bit longer, but you get the point.

Business impact due to recent outages and security breaches for some of the smaller customers was significant. Some of them just had to wait and watch with no option. A few had spread the risk across, and thus, the impact was limited. The big enterprises shrugged and moved on. How does one balance the adverse business impact against the cost savings? To me this is a bad compromise as everything is subservient to business interest.