Very few CIOs relish the prospect of negotiating contracts with suppliers. But in a difficult economy, sometimes you need to bite the bullet, call a supplier and say, “You know, this deal just isn’t working out.” That’s when you need all your ducks in a row, because renegotiating a contract requires more than just courage. You need to know precisely what you’re trying to achieve and be ready to offer alternatives.

The best way to make sure that vendors keep their promises is by demonstrating that working with you is a win-win situation – and all such happy relationships begin with strong contracts. Ideally, they should function like rulebooks used in competitive sports, providing a guide for resolving issues and getting on with the game.

Always make sure that you ask the vendor one simple question: “Does this contract contain everything I need to achieve my objectives?” If the vendor cannot give a straightforward answer, hold off on signing the contract. If the contract has already been signed, explain your problem to the vendor and do everything in your power to negotiate the parts of the contract that are creating problems.

But good contracts are only the beginning of the process – you must also demand continuous improvement from your vendors. Benchmarks can be written into contracts, but it will be your responsibility to make sure your vendors actually deliver on those promises.

One expert at negotiating IT supplier contracts whose opinion I value is Bob Turner, the CEO of Smart Software Deals. “Every supplier has its own way of structuring deals, pricing software and services, and negotiating contract terms and conditions with their customers. So the first thing that a CIO needs to do is to figure out how each supplier approaches the table,” he says.

Long before the negotiations begin, the CIO has to decide if the relationship with the supplier will be strategic or tactical – will I be counting on this supplier to help the enterprise achieve its strategic business goals, or am I only hiring this supplier to fix a short-term problem?

Then the CIO can decide what type of agreement to pursue and negotiate accordingly. The supplier’s sales team will want you to sign an agreement based on the supplier’s standard terms and conditions. Your job is to push back and get the supplier to focus on your business objectives. “Frankly, most CIOs are not great negotiators,” says Bob. “For example, let’s say the CIO is planning to use a supplier’s software for five years. They also know that the business is likely to grow over that period of time, and that they will need more licences. It would be foolish for the CIO to negotiate a contract that doesn’t reflect their knowledge, but often that’s exactly what happens.”

In a situation like that, a sharp CIO will negotiate a five-year deal that addresses the expected growth – and does not include the annual price increases the supplier will initially demand. “If the CIO commits today to growth, then the supplier should commit to pricing the additional software at current prices,” he advises. “Otherwise, why would anyone assume the risk and commit to the additional software before they have identified an actual need for it?”

Understanding the process

It is vital for the CIO to understand how the supplier recognises revenue and how its sales teams are compensated. Most software companies and sales teams measure success by totalling up how much revenue they booked from selling new software and adding new licences over the last 12 months.

When you understand this, you can respond with a practical counteroffer: tell them you want a multi-year contract and that you’re willing to commit to buying some additional software, upgrades and professional services from them. In exchange for those commitments, you expect the supplier to discount the price of new software and additional licences you buy over the life of the contract.

These are exactly the kinds of win-win deals the CIO should be seeking. In truth, however, many CIOs do not have the resources or the experience required to negotiate intelligently with suppliers. But if you put together a team with depth and experience, chances are that someone on your team will know enough about a particular supplier to give you an edge.

Avoid falling into the common trap of automatically renewing agreements with suppliers. Remember, we are operating in a highly dynamic landscape. If you negotiated a contract two or three years ago, the chances are good that the contract is already obsolete in many respects. So you need to go back and re-evaluate the contract’s value to your business. Do not be afraid to demand an explanation of any terms in the contract that you do not explicitly understand.

It’s also useful to make a checklist of everything that is important to your organisation and share it with your vendors. Explain to them that you expect them to follow your checklist, and that your checklist is likely to change over time.

The critical point here is that the checklist serves as a practical tool for keeping your priorities front and centre in the supplier’s mind. You can also use the checklist as a basis for renegotiating contracts.

The good news is that most suppliers are aware of the pressures that you are facing, and most of them will agree to revisit aspects of a contract that no longer make sense in the current economy. Do not be shy about reinforcing the idea of win-win scenarios when you are talking with suppliers. For example, if you need to reduce the scale of a project, the supplier can probably scale back the size of the development team required to complete it. If you and the supplier are committed to making the deal work for both of you, there is a good chance a better deal will emerge.

The power of negotiation

When I was hired as the CIO of General Motors Latin America, one of my first responsibilities was signing a ten-year contract for IT support services.

The contract was huge, complicated, and had been drafted 18 months earlier. I thought it was already obsolete and did not want to waste several weeks sorting through the details of a contract someone else had drafted. I needed to focus on the business challenges facing GM. So I called a meeting with the supplier and told them I was signing the contract, but that I was going to do what made sense for GM whether it was in the contract or not.

The supplier was highly dependent on GM for revenue, so I knew that I had the upper hand. Nevertheless, it was hardly an ideal way of doing business and it took months for me to get everything straightened out properly.

The moral of this story is that you, the CIO, must control the contract process. You can hire specialists and consultants to help you, but you must not simply delegate the contract process to the supplier. That would be a serious mistake.

José Carlos Eiras was most recently CIO of DHL Express USA and for almost a decade led IT at General Motors across Europe, Latin America, Africa and the Middle-East.

• See also our in-depth feature examining the fast-changing nature of IT contracts.

Extracted with the permission of John Wiley & Sons from The Practical CIO: A Common Sense Guide for Successful IT Leadership by José Carlos Eiras, with a foreword by Tony Scott, CIO of Microsoft (2010).