Negotiate your Maintenance Contracts

One of the games our industry has played for as long as I have been around, is with maintenance contracts. These contracts are the lifeblood of most of these organizations as they generate run rate revenue well beyond the initial sale. If you don’t read the fine print in your contract most vendors have clauses written into them that allow them to increase the MSRP (Manufacturers Suggested Retail Price) at a reasonable rate each year. Or in some cases they can just raise it as they see fit. So here is some simple math for you: Initial Purchase of $100,000 with first year maintenance not included. Now you think to yourself that the maintenance should always be based on your purchase price of 100K well you are wrong “Dead Wrong”. In that support contract remember it said that maintenance and support is based on the MSRP not the selling price. So, the vendor baited you in and you bit the hook on their massive discount they provided you. It is very common place to have a discount level of 50 % or higher especially in the storage business. With that assumption let’s say that the vendor did indeed give you 50 % off and the list price (MSRP) was $200,000. This means that the maintenance is based on 200K not on 100K. Also, many vendors have stopped including the first year’s maintenance free in the product. In order for us to get into this solution in the first year it would actually cost us:

Initial Purchase        $100,000

1st year Maintenance    $ 40,000

            ==========

Total 1st Year        $140,000

 

        Wait it gets even better because, remember that little clause in your support agreement that let the vendor increase the value of their product over time. So let’s assume the following for year’s 2-5:


            Increase MSRP by 5 % per annum reasonable inflation, right???

 

            2nd Year MSRP = $210,000, 3rd Year MSRP = $ 220,500, 4th Year MSRP = $231,525, 5th Year MSRP = $243,101

 

            Now remember you pay 20 % per annum and if you opted to buy only 1 year upfront. And continue to purchase in 1 year increments this is what it looks like.

 

            2nd year Maintenance    $ 42,000

            3rd year Maintenance    $ 44,100

            4th year Maintenance    $ 46,305

            5th year Maintenance    $ 48,660

 

        The total cost of this solution is:

            Initial Purchase        $ 100,000

            Maintenance 5 yrs    $ 221,065

                        ========

            Total            $321,065

 

I humbly ask all of you readers out there that have had to pay what feels like extremely high maintenance and support costs to read the fine print. This vendor in this particular case has more made more than double the initial purchase price of 100K. So ask yourself this question: Did you really get that 50 % discount? The way I see the math I sure don’t think so.

 

In closing I would give the following advice to anyone that is looking to make a hardware purchase in the next 12-24 months:

 

  1. Read the fine print on your maintenance contracts.
  2. Negotiate those support renewals up front to save.
  3. Don’t accept the rates that are first presented in front of you.
    1. You wouldn’t go pay sticker price for a car would you? So why would you pay more than full price for maintenance.
  4. Do you really need the highest level of support from the vendor?
    1. What type of service guarantees are they placing on it if you did purchase it. You should have some kind of cost recovery written into the contract.
  5. What is your recourse if the solution doesn’t work as advertised?
    1. Have a performance guarantee written into the deal. It is a way for you to get out if the hardware falls down and doesn’t perform.
  6. Ask when the quarter or the year end is for the vendor. Most vendors have extra special discounts during these times.
  7. Ask if the vendor has a pay as you go support model.
    1. For example, you can call Microsoft whenever you want and it is only a 400.00 ticket if you don’t have an agreement. 221K goes a long way towards support tickets.
  8. Instead of buying all the extra maintenance why not just buy two of the units and have one as a cold spare.
    1. You are pre-paying for basically insurance that in the event something happens the vendor will ship you hardware. Why not just have it pre-purchased and onsite already.
  9. Get multiple vendors bidding on the same solution.
    1. Nothing helps you save money faster than having some friendly competition.
  10. Get creative with the vendors.
    1. Do things like asking for 24 or 36 months of support to be included in the deal.

 

On a lighter note here is a video from Microsoft to help you learn more about negotiating.


 

Super Cristal