The 9 % increase you never negotiated

Constructed figure, assumptions listed

Your contract was signed at 40,000 euros. You budgeted it at 40,000 euros for the following year, because nothing in your relationship with this vendor gave you reason to think otherwise.

The vendor, for its part, announced an average increase of 9 % on its offerings. Not on yours specifically. On a scope that includes yours.

What compounding does to your budget

A 9 % increase doesn’t add up, it compounds. Each year starts from the previous year’s price, increase included.

With the scope unchanged, without one more licence, without one more feature, the contract costs 61,545 euros in the fifth year. Over five years, you will have paid 260,933 euros where the signing price promised 200,000.

The gap, 60,933 euros, corresponds to a year and a half of contract. No one billed it to you all at once, and that is precisely why it was never weighed up.

The three forms the clause takes

Open your contract and look for the price revision clause. It takes one of these three forms, and your exposure has nothing in common from one to the other.

A numeric cap. “The annual increase shall not exceed 3 %” gives you a known maximum exposure, which you can provision to the cent. This is the comfortable situation, and it is rare.

A reference index. Indexation on a public index is verifiable and bounded by economic reality. Check which one, and over what period it is measured: the gap between two seemingly similar indices runs into points.

Nothing at all. The contract says nothing, or refers to the public price list in force on the renewal date. Your exposure is then whatever the vendor decides, and the table above becomes your working scenario.

What you will be told, and what to answer

“It’s inflation.” A 9 % increase on software whose production costs are mostly fixed is not indexed on inflation. Ask for the exact reference of the index used. In the absence of an index in the contract, the increase is a commercial decision, and a commercial decision can be negotiated.

“All our clients go through this.” Probably. What matters to you is not the fate of others, it is your alternative. A vendor does not respond to a fairness argument, it responds to the risk of losing revenue.

“We can freeze the price if you commit for three years.” That is the standard trade-off, and it is often a good one. Check two points before signing: what happens to the price once the three years end, and whether the commitment covers a minimum licence volume you will no longer be able to reduce.

“The negotiation will happen at renewal time.” That is the costliest mistake. By renewal time, your termination notice period has already expired and the vendor knows it. The useful negotiation happens a month before the notice period opens, while you still have the option to leave.

To check for yourself, in twenty minutes

The expiry date and the notice period. Note them in your CFO’s calendar, with a reminder two months before the notice period opens. It is the only point in this contract that is entirely yours.

The revision clause. Copy it verbatim into your vendor file. If it is absent, write that down in black and white: it is an uncapped exposure to document.

The number of active licences compared to the number paid for. A 9 % increase on unused licences is the worst euro in your budget. It is also the argument your vendor can least contest, since the count comes from its own console.

The amount to provision. Take the spreadsheet, replace 9 % with the rate written into your own contract, and enter the following year’s result into the budget. If your contract mentions no rate, provision the 9 % scenario and make this gap the subject of your next negotiation.

The sentence to remember

An annual increase isn’t read on an invoice. It’s read across five fiscal years.

Open in a spreadsheet · The increase scenario, as a spreadsheet (585 bytes)