It’s not uncommon for vendors to tie IT contract renewal price increases to the Consumer Price Index (CPI). For decades, the argument has been sensible. If it costs more for a vendor to deliver a product or service, it’s reasonable for a vendor to build those cost increases into their price.
Then 2022 happened. Over the last 12 months, the CPI has increased 8.2% leading to record-high inflation. Meanwhile, most enterprises are already paying their largest IT vendors quite a bit more. Since the pandemic, many IT vendors have implemented bold price increases to account for chip shortages, labor shortages and persistent supply chain disruptions.
This presents a dilemma for enterprises currently or soon to be negotiating IT contract renewals. Does tying vendor renewal rate increases to CPI still make sense?
What is CPI?
CPI is a unit of measurement for the average change in prices that consumers pay for goods and services over time reported by the US Bureau of Labor Statistics as a percentage. CPI attempts to quantify the aggregate price level in an economy and measure the purchasing power of the currency.
How does this affect my IT contract renewals?
Historically, NPI has seen contracts include renewal pricing that is calculated by adding a reasonable price increase to the CPI. Until recently, CPI has been around 1 to 2%, and vendors’ rate increases were in the 1 to 3% range. NPI often saw this proposed increase be waived or decreased (negotiation intel and price benchmark analysis are the key). If negotiations were unsuccessful (due to time constraints, lack of leverage, etc.), as-is renewals typically saw 3 to 5% increases, which was not unreasonable.
Today, however, a normal 3 to 5% increase can now become 10 to 12% when factoring in a CPI of 8%+. The table below illustrates the impact this could have on an IT contract with annual fees of $1M.
What does this mean?
Vendors are unlikely to force their customers into this extremely high annual increase because they know that this is not reasonable (although that’s not to say they’re not trying – see IBM’s increase to Monthly License Charges). For many technology companies, CPI does not affect their cost of business by nearly as much as it impacts the average consumer – and, as mentioned earlier, many have already passed on some cost increases.
Many vendors will likely inch up their increases a bit more than usual but will frame it in a way that they are “saving” you from a 10 to 12% increase via cost avoidance. The cost avoidance could be 20 to 40% depending on the exact percentages and duration of the contract (see table above).
End Result
Negotiating IT contract renewals is always difficult and the recent increase in CPI adds another factor – especially for customers that are contractually bound to contract terms that tie current CPI levels to price increases. NPI recommends enterprises push their IT vendors to approach renewal rate increases reasonably and explore ways to lock in price protections that benefit both the buyer and seller. Alternatively, a more direct message can be “Let’s work to fix this today so I don’t need to issue an RFP.”
If you need help mitigating IT contract renewal rate increases, NPI’s price benchmark analysis and negotiation services can help. Contact us today.
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