Two Truths Behind Securing Better Deals

By Joe Auer

Over the course of 37 years in the business of technology deal-making, I’ve learned a lot about the people and 10 truths that play a part in every negotiation. Two truths, which I detail here, are useful anytime but critical in an economy that’s undergoing a “correction.” Now more than ever, with pressures from the CEO’s office to be very careful about – or even cut – IT spending, we need to focus on doing better deals and managing deals better.

One truth is that you have to hear some “no’s.” In other words, you must have some deadlocks and impasses in your contract negotiations. This should be no surprise, given the contrasting goals of a vendor, who wants to maximize revenue, and you, the customer, who is dedicated to minimizing costs, especially in a down economy.

Here’s an interesting scenario: A vendor makes you an offer, “$1 million.” You respond, “Not a dime more than $900,000.” The vendor says, “Done deal.” How good is the deal you got? With a response as quick as that, you obviously left some substantial bottom-line dollars on the table.

Based on the conflicting financial objectives between client and vendor, you must be assertive enough on these issues to hear some “no’s” – and not just one. That means you have to go beyond “vendor acceptability” several times to find where it really is. You have to ask for what you want – assertively. That’s not easy, because almost no one likes conflict; we’d all rather just do the deal. That may be fine for some deals, but not for better ones. To get better deals, understand that you don’t get what you don’t ask for. So, be convincing when you say, “Excuse me. Unless we have this and this and this, we can’t do business.”  

Another truth is one that seems to be frequently overlooked or, at best, given minimal attention. That is: Contract remedies are essential. If the vendor doesn’t face any consequences if it doesn’t produce specified results, the contract probably isn’t worth the paper it’s written on. Sometimes the vendor will live up to its responsibilities, even without stringent remedies in place. But in most cases, remedies are the catalyst to a good deal.

There are different theories on remedies, two of which I disagree with. Some people believe remedies should exist to punish the nonperformer. And, some believe remedies should exist to compensate the side that has suffered the loss of performance.

Both theories are wrong. Remedies – which vendors don’t like – should motivate them to perform, not punish them. I’m not talking about cases where you pay extra for something the vendor should have done. Remedies should be designed to spur the vendor in case it doesn’t live up to the terms of the contract.

My favorite question to a vendor when negotiating remedies is: “How much confidence do you have in your ability to perform?” Most vendors answer, “100%!” My response: “Good. Then you’ll have no problem with these remedies. If you were worried about the remedies, I’d be concerned that you can’t do the job.” Remedies are evidence of the vendor’s confidence in its ability to perform.

Remedies also should have three tiers. The bottom tier should be problem-solving remedies. This level would include things like having to add more people, bringing in different equipment or bringing the two companies’ CIOs together. The next level, attention-getting remedies, might involve the customer receiving liquidated damages (money) based on a predetermined performance guarantee. The third level is what we call global thermonuclear war remedies. This is where you talk about getting out of the deal and getting your money back.

If you don’t have remedies in a contract and you suffer as the result of a vendor’s lack of performance, what are your alternatives? You can go to court, or you can begin arbitration or mediation. None are good. They’re costly and time-consuming – and there’s no guarantee that you’ll win.

If you focus on these two truths, as well as my eight others – you’ll do better deals than 98% of all companies.

Maximize Your Power in a Sole Source Deal

By Joe Auer

The absence of competition can make any deal arduous. You’re starting at a negotiating disadvantage, and if you aren’t begging yet, you soon will be when the supplier figures out its position.The only way to avoid having to beg is to create alternatives — or the illusion of them.

Your having negotiating power is the best defense against a cozy incumbent offering higher costs for the same service. If you don’t have any, create some. Here’s how:

First, issue a Request For Proposal (RFP). Even if it’s issued only to the incumbent, it gains you power, especially if you can keep the vendor’s solo status a secret. I’m not suggesting you lie about what you’re up to — just that you shut down the vendor’s normal information flow that lets him know everything that’s going on with your organization.

Second, just wait for the response. Suppliers tend to fear the unknown and will fear the worst, responding with an aggressive deal to keep the account. A major midwestern food company saved $3.3 million on a version of this strategy, the whole story to appear in a future column.

Third, review the supplier’s proposal and refine your negotiating strategy based on the supplier’s response to your stated requirements. You now have leverage. Go for what’s important, striving always to reduce, or limit, price and risks while obtaining more contractual protections. Incidentally, you can add certain new contract issues to the bid requirements and correct some relationship problems you may have had with the vendor.

Fourth, begin to negotiate aggressively with the supplier. Stress you may prefer to renew the relationship but they must earn the business to continue. Remind them they are a preference, not a need. Press on with the negotiations, but build in some down time to allow the supplier to think you may be negotiating with others.

Your supplier probably suspects you don’t have any real immediate alternatives. Your best defense is to point out to the supplier that thereare always alternatives. Then, start discussing alternatives thatdon’t include the incumbent supplier. Note: Developing the best alternative to a negotiated solution before you negotiate is a proven strategy. Focus your supplier’s attention on keeping your business, rather than maximizing its position.

Defending Your Process

Recently, on a software acquisition, a supplier confronted a sophisticated customer that has a good deal-making procurement process and commented, “Gee, your procurement process takes too much time.” This comment just happened to be skillfully laid as well before the customer’s technical architect.

This popular vendor ploy is normally effective for two reasons. First, it can disarm the procurement process by convincing the technical architect the process itself causes unreasonable delays and puts the project time line in jeopardy. The alarmed technical person then pressures the “bottlenecks.” This divides the customer’s team as it pits technical person versus procurement person.

Second, this ploy attempts to eliminate competition by suggesting the lengthy investigation and evaluation of others is unnecessary, since the perpetrating vendor could immediately provide the solution were it not for that cumbersome procurement process.

Fortunately in this case, the technical architect was experienced and trained on vendor ploys. He recognized this ploy for what it was and clued in the rest of the acquisition team.

The team responded to the supplier in the best possible way: “This is our procurement process. We use it for all procurements, and you are expected to adhere to the process just as your competitors do. Also, please be reminded you are under evaluation and any more subversive behavior will be viewed very negatively.”

The user also stressed to the unruly supplier that careful attention was paid to determining requirements so fact-based decisions can be made. And with all the clarity the statement deserved, the user added, “We take the time to do it right the first time.”

By taking this stance, the user instantly disarmed the ploy and re-focused the supplier’s attention on meeting requirements and keeping up with competition. It also clearly sent a message that the customer was committed to a disciplined process that could not be subverted — and was in control of the relationship. Now that’s a recipe for a successful deal.

Beware of Vendors Bearing Year-end ‘Gifts’

By Joe Auer

It’s that time of year when many suppliers offer their year-end specials – price discounts and additional goodies – if you sign now. Their motivation is to show year-to-year sales growth and higher incremental profits with a resulting higher stock price.Driven by this desire to book business before the end of the year, supplier representatives often have the latitude to offer “special-deal” incentives. But remember that vendor reps are highly trained and experienced in using urgency to their advantage. Technology suppliers are well-oiled marketing organizations. Everyone from your friendly account rep up to the vice president is pressured to exceed an annual sales quota.

But for the well-prepared customer, this can be an opportunity.

While the end of the year may indeed be an ideal time to negotiate a good deal, it can also be a trap for the unwary. Haste always makes waste for an IT customer. Don’t let a vendor rush you into signing a contract, because you could lose out on further cost savings and contract protections.

Nevertheless, vendors get normally prudent customers to act otherwise by rushing into a contract with lines like: “You know, it’s almost the end of the year. We’d like to get your order in this year’s business, so we’re cutting you a super deal. If we don’t get it signed this year, these concessions probably won’t be available in January.”

The supplier’s motivation may be genuine, but it’s using a highly effective ploy that’s designed to get you to buy now. The risk to the customer is that he can lose focus and react solely to a good price and other goodies, but at the same time he can also give up warranties, remedies for nonperformance and other valuable contract protections – issues that can cost serious money.

There’s no substitute for a thorough analysis of a supplier’s offer. In addition to the “great offer,” consider these three points:

• Is there a legitimate business need for the product?

• Are there incentives offered that can be of value to the business?

• Are the terms and conditions favorable?

More often than not, these year-end specials come up short when it comes to favorable terms and conditions.

Usually, the supplier insists on using its form contract, arguing that it’s necessary to close the deal by the end of the year. Even savvy customers have been known to get excited by the year-end hype, cave in and sign the form agreement. But of all the marketing ploys designed to get a signature on a contract, this one can play into the hands of the well-prepared customer.

Keep in mind that the vendor’s “super” offer should be considered only a point of departure for negotiations. Begin negotiations the first moment the acquisition is contemplated, not the last. From that point, a persistent and logical pursuit of your concerns will help convince your vendor’s salesperson that there is a deal to be made, but it’s a matter of “resolving a few things first.”

It’s also important to recognize that even if both sides would like to do a deal by the end of the year, you must focus on what’s truly important, like service levels, warranties, remedies for nonperformance, broad rights to intellectual property, results-oriented support guarantees and absolute clarity of contract terms and conditions. Obviously, this is a key time for your procurement team to prioritize its objectives, gain strong consensus and have all members commit to the negotiating position.

If you have any substantial doubts as to whether the deal should be completed by the vendor’s sale deadline, the signing of the contract should be delayed. In many cases, when the vendor has used the end-of-the-year ploy and the customer has refused to sign, that “absolute best deal” has continued to be available for months into the new year. This is especially true when the marketing rep is eager to make that first sale of the new year.

Remember: A time limit on negotiations benefits the best prepared, so get ready for the year-end rush.

“One Easy Payment” — A Costly Ploy

By Joe Auer

Many technology suppliers today offer one-stop shopping: equipment, financing, software, maintenance and services all rolled into one payment. While this can be a quick and easy solution, especially in the desktop world, it may turn out to be an expensive solution. Here’s why: When all the components are bundled into a single package price, you don’t know the true costs of each. You may overpay for a particular segment of the deal.

Car dealers have developed this seductive packaging technique to a fine art with their one “low” monthly payment-which spares the eager consumer from dealing with the new car price, the trade-in amount, the financing issues, insurance, shipping, get-ready charges and the like.

The optimum way to negotiate either technology or cars offered under this sales model is, first, to recognize that attractive packaging can be very expensive. Then break the package apart, and compete, negotiate and optimize each and every component. Make it clear to the packager that you are very willing to acquire on a line-item basis-and that each part has to stand the test of competition. When you’re through, don’t be surprised if the sum of the negotiated parts is lower than the original package price.

Driving the Deal

The Right Attitude

By Joe Auer

One of the more important issues when I advise IT buyers is their basic attitude toward contract negotiations. In many situations, the end user or senior management has a friendly, close relationship with representatives of the vendor. The vendor is referred to as their partner, friend or the one with the solution to their problem. As a result, these stakeholders, who must protect their company’s interests, can be less than objective in analyzing the vendor’s proposals, promises and provisions.

Whenever I brief the key players on the customer’s negotiating team, I use the following “attitude adjustment” points, which are useful for all of us:

• Negotiations begin when the first person in your organization exchanges information with the vendor. You gain or lose negotiating power with every succeeding interaction.

• The customer is the buyer, and the vendor is only the potential supplier. You’ve got what all the vendors want – the money.

• Change your “needs” to “preferences.” Needs aren’t negotiable; preferences are. Don’t tell a vendor you need it, its product or its service. Just say you prefer it.

• At negotiation time, the vendor’s sales representative has projected to his management that the deal with the customer has already been sold. Use this to your advantage, since the sales rep has placed the pressure on himself to close the deal.

• Vendor reps face many pressures to reach certain sales goals at various times, such as quarterly, annually or when earnings are down. Be aware of these pressures.

• Vendors will try to exploit almost any sense of urgency. Remember that haste makes waste, unless your side is the better prepared, has alternatives and sets a deadline that’s to your advantage.

• Generally, it’s to the customer’s advantage when vendors bring in their top brass, as long as the customer is unimpressed with warm-and-fuzzy talk about relationships and places on the agenda substantive negotiation points to address with the vendor’s executives. They have more to give away than the sales reps do.

• Never rely on vendor promises and benefits unless they’re written in the contract, and hold the customer personnel who trust those promises accountable.

• Vendor shareholders and senior management are primarily interested in bottom-line profits and allocating risks to the customer, not interpersonal relationships. Don’t rely on these relationships; vendors just use them to get what they really want.

• Multiple acquisition methods (leasing vs. purchasing, short- vs. long-term contracts) should be considered in most cases, though vendors will try to give you tunnel vision that benefits their current performance objectives.

• The customer does have alternative vendors, approaches and deal timing, and both sides should be aware of that during negotiations.

• Vendors must be aware that negotiations will end only when the customer is fully satisfied and the agreement is fully documented.

• Ignore a vendor’s claims, especially early in negotiations, of “That’s the best deal we can give you.”

• If you haven’t heard a no from the vendor or haven’t experienced a deadlock, impasse or some sort of breakdown in negotiations because you asked for too much, you haven’t gotten the best deal you can get.

• Remember that negotiations are enhanced by thorough planning, knowledge, teamwork and dedication to securing the best contract protections at the best price.

• Most important, remember that competition is your strongest ally. Don’t select a vendor until you’ve gone through competitive negotiations on everything, including the contract, with at least two potential vendors.

You and the rest of your negotiating team should keep these points in mind and review them like you would review a checklist before each negotiation. After all, other professionals, like pilots who have been flying for 20 years, still review their checklists before takeoff.

JOE AUER is president of International Computer Negotiations Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of High Tech Acquisition Professionals. Contact him at joea@dobetterdeals.com