The value of multi-year agreements

Oct 29 2009 by Richard Lane , The Journal

MOST OF us have purchased multi-year contracts for our mobile phones or insurance, so why don't more businesses use them when they're buying or selling software?

Many of the software and technology businesses I've spoken to over the past six months offer annual contract terms with no option for their customers to commit to them over a fixed longer period. And I always wonder why!

Using multi-year contracts can deliver many benefits to both the suppliers and their customers. I’ve listed a few below to help you re-think your strategy, no matter which side of the table you’re sitting on.

As a supplier, I see multi-year term contracts as a statement saying that you're ready to move beyond tactical day-to-day discussions towards being partners. It's a commitment to sharing strategy and agreeing longer-term goals that both parties can influence.

Building up a strong order book of committed revenue is a tangible sign of a robust business, allowing you to invest in R&D or staff and product expansion plans – backed by the security of guaranteed annual revenues in future years.

Switch your focus to signing multi-year contracts and instead of wasting time and energy trying to renew accounts every year, you'll be able to seek out new business opportunities and support your long-term customers more effectively.

As a buyer of software you want to be able to plan ahead with accurate budgets, reduce your annual costs and hold prices to negotiated levels (particularly in growing or expanding markets). It’s also worth remembering that contract negotiations can take significant time, effort and energy. Clever organisations think about all of these unseen costs and negotiate three-year contracts as standard in order to avoid them.

Of course, there are important questions to consider before entering multi-year agreements. For example is your supplier a stable business and around for the long-haul? And is the market or your company likely to change dramatically within the timeframe you're committing to?

As a supplier, you want to be sure you are not locking your price down should the market allow for increased margins, and you want to be sure the product or service you're selling is going to remain core to your business.

Richard Lane is managing director of Engleby Associates, a sales improvement business that helps software and digital firms increase their sales through the development of their people.