End of the Quarter? Squash Them!

Learn how to counter this ploy at the IT Procurement Summit (InterContinental Hotel) in Chicago on September 20-21.  You can register here.  Very funny video, take a look:

Ten Truths of Negotiations – Truths #9 & #10

This will conclude our “Ten Truths of Negotiations” piece.

Truth #9. Remedies are essential. In this instance, I’m referring to remedies in the contract, not remedies under law. Building on a previous truth—if it’s not in the contract, it’s not in the deal—if there are no remedies when a vendor doesn’t produce specified results, the contract probably isn’t worth the paper it’s written on. Sometimes the vendor will come through, but in most cases the remedies must be there…in writing.

There are different theories on remedies. In my opinion, two of those theories are wrong. Some people believe remedies should exist to punish the non-performer. That’s wrong. Some people believe remedies should exist to compensate the side that’s suffered the loss of performance. I believe that’s wrong, too. I believe remedies should motivate vendors to perform. When I say motivate, I’m not talking about paying extra for something the vendor should have done anyway. I’m talking about remedies you can exercise to motivate the vendor in the event of nonperformance.

My favorite question to a vendor when we’re negotiating remedies is, “How much confidence do you have in your ability to perform?” Most vendors respond with “One hundred percent! No problem!” Then what do you say? “One hundred percent? Then you should have no problem with these remedies. If you’re 100 percent sure you’re going to perform, these remedies could be ten times what they are, and you wouldn’t be bothered by them. Right?”  I go even further by saying, “The more you worry about these remedies, the more you scare me that you can’t do the job.” I believe that remedies are there as evidence of the vendor’s confidence in its ability to perform.

I also believe that remedies should be three tiered. The first level should be problem-solving remedies because that’s what you really want to accomplish. This level would include having to add more people, bring in different equipment and get the vendor and customer CEOs together.

The next level is attention-getting remedies. This might include running an ad in the Wall Street Journal or having the CEO of the company that manufactures a helicopter that crashed ride in that same model helicopter.

The third level of remedies is what we call the “global thermonuclear war” remedies. At this level you talk about getting out of the deal or getting your money back.

So remedies are essential. If you don’t have remedies in your contract and you suffer as the result of the vendor’s lack of performance, what are your alternatives? Live with it or what? You can go to court, or you can begin arbitration or mediation. These are not good alternatives.

Truth #10. Don’t select a vendor before you’ve negotiated the deals. This is a tough way to negotiate. It involves a situation where there are alternative vendors involved in a procurement or evaluation. Why would we select one vendor, tell them they have the business, tell the competitors “thanks but no thanks,” tell everyone in our organization that we’ve selected this supplier, disclose more information to that vendor—like how badly we need them, become more and more dependent on them and then try to negotiate with them? Why would we do that?

There’s only one reason I can think of—vendors have trained us how to negotiate. I’m reminded of a time when we went to a client on an outsourcing deal. We had met this client at an outsourcing seminar. About halfway through the workshop, one of the client’s people said, “We’re in a tough deal. You’ve got to come help us.”

A couple of us from ICN went to the client location, and we were briefed on the deal. They not only had selected the vendor, but that vendor had said that to get a negotiating team authorized, the customer had to put up $500,000 good faith money. Another vendor requirement was that the customer not talk to other suppliers. The customer complied with all of this. Exacerbating this was the fact that a date had been identified when employees hired by the outsourcing vendor would begin working. This was the situation when the customer asked us to help negotiate the deal.

At that point, we asked the client to pay the expenses for our trip and told them we wouldn’t charge a fee because the negotiations were over. They refused, saying that we didn’t understand—the negotiations had not yet started. We responded by telling them that they didn’t understand—the negotiations were over. How well can you negotiate under the circumstances I described? The moral of the story is, don’t select a supplier until the contract has been negotiated—with two or more vendors.

For more than 35 years, ICN has been using what we call the “Zone of Consideration,” a concept that involves negotiating with two or more suppliers. During that time, there have been clients who have said things like, “We won’t do that because Vendor A is a slam dunk. Everyone wants them.” We’ve encouraged these clients to negotiate with one or more other suppliers.

When our advice has been accepted, 25 to 30 percent of the time clients have selected a vendor other than the “slam-dunk” one. That was because things happened during negotiations that changed their minds. You learn extremely valuable things about a vendor during true negotiations. When multiple suppliers are being considered, negotiate the deal before any decision is made. Do this with two or three vendors. Negotiating with three is more fun because you can eliminate one and still have two in competition for the business.

Those are my ten truths—distilled from four decades in the business. I believe that if we focus on and implement these truths, we can do better deals and do them better than 98 percent of the people out there. Remember though, after you’ve done them, you have to manage them. By doing better deals and managing them better, you’ll be head and shoulders above the rest!

Ten Truths of Negotiations – Truths #7 & #8

Truth #7. The entire procurement process is about control and negotiating power. Anyone who has been on the vendor side can confirm this. The most used term in vendor vocabulary is account control.

As I said earlier, we give vendors massive amounts of negotiating power. What has to happen is that we have to think in terms of negotiating power for ourselves. The right process or the right attitude isn’t enough. It’s about negotiating power.

I often hear people say, “Gee, Joe, I’m negotiating with so-and-so and trying to do x-y-z. How do we do it?” In each case, the answer depends on your negotiating power. You can know the best deal ever given to any customer, but if you don’t have the negotiating power, the vendor won’t give it to you. Why should they? If you got it under those conditions, I’d disqualify the vendor as being too stupid to stay in business.

 If you build negotiating power into the fabric of your company, you can be very gentle when it’s time to negotiate. Consider a vendor such as IBM. People have said to me, “IBM will give me anything. I’ve seen IBM give away the store to get an account. We’re a prestigious account with alternatives. We have negotiating power.” The next thing I hear is, “I can’t get anything, Joe! What happened?”

My response is, “Let me see. The IBM account rep’s office is right next to your CIO’s, right? Your executives went on an executive retreat and mandated that IBM be a strategic partner, correct? You shouldn’t be surprised that now you can’t negotiate anything with them.” In short, as a client, you no longer have any negotiating power.

Truth #8. You have to hear some noes. This truth often comes as a surprise to people. However, you do have to have some deadlocks and impasses in your negotiations. Here’s a scenario: A vendor makes you an offer: “One million dollars.” You respond, “Not a dime more than $900,000.” The vendor says, “Done deal.” What do you think? How good is the deal you got?

Based on the conflicting objectives of profit as well as cost and risk, we know that you’re going to have to be assertive enough on these issues to hear some noes—and not just one. You have to ask, ask, ask. That’s not easy; almost no one likes conflict. We would rather just “do the deal.” That may be fine for some deals, but it’s not fine for the better ones. To get better deals, you have to make assertiveness part of your corporate culture and its processes.

When that’s the environment, there’s support when you hear the noes. That support will bolster your negotiating position. You can be convincing when you say, “Excuse me. Unless we have this and this and this, we can’t do business.” And when the vendor does an end run to a senior executive in your organization, it’s great if the vendor doesn’t know that the senior executive is on the negotiation team and has signed a position paper containing your objectives. But if that executive isn’t on your negotiating team when the vendor does that end run, your negotiating position can crumble.

Ten Truths of Negotiations – Truths #5 & #6

     Truth #5. Information is power. Who do you think ranks higher in terms of having information about the other side—the customer or the vendor? As clients, we offer the vendor office space and security passes, we allow free passage through our building and access to our computers and then we try to negotiate with them. No surprise…it’s a mismatch.

     Ask a vendor if you’re “partners.” Most likely, the answer will be, “Oh, YES!” Then, in the context of partnership, ask for equivalent floor space in their headquarters; ask to sit in on their planning meetings. Of course, they’ll reject that idea, citing proprietary information. On the other hand, we give our vendors an inordinate amount of information about us. That’s a mistake. I wouldn’t let them have more than is absolutely necessary for them to complete the project for which they were hired. Any information you give them beyond that gives them negotiating power over you.

     I’ve even seen clients lose competitive intellectual property through on-site vendors who also work with the customer’s competitors. An on-site vendor sees how something is being done; they may very well be getting paid to learn that something. On the other side of town or on the other side of the world, another of the vendor’s customers magically learns that same concept soon afterward. I’ve seen this more times than you might believe.

     Truth #6. Don’t worry about the vendor’s feelings or profits. Both are the vendor’s responsibility. How often have you heard someone caution not to “beat up” a vendor because the vendor must make a profit? This is a true statement: they must make a profit. I’ll go even further: if our deal isn’t profitable for them, we’ll end up losing in the end. But to whom does the responsibility fall to ensure that the vendor makes that profit?

     Here’s what happens on the vendor’s side of the table, just to ease your mind about feelings and profits. Imagine you’re the customer and I’m the vendor. You negotiate your best deal and sign the contract. I take that contract to my manager. If the deal is close in either of two areas—yield or risk—there’s a team of people waiting for me at headquarters. This is the deal review team, which assesses whether or not a profit is going to be made. The team also determines if too much risk is being taken—by the vendor, of course. Both areas must be acceptable. The customer is not there saying, “You must sign this deal.” The vendor decides on its own, without any pressure, if the profit and risk levels are acceptable. If there’s too much risk or too little profit, the salesman will return to the customer and say he couldn’t get the deal approved; it must be renegotiated.

     I think you can negotiate a great deal without ever raising your voice, if you have the negotiating power. You can even ask for what you want very nicely, but you must ask. For example, when I was on a vendor negotiating team, there were two types of people whom we thought were fools. One type was the people that fell for everything, all the ploys. You walked out of the negotiating session saying, “Can you believe those guys just left three-quarters of a million dollars on the table? What fools!” There also were the people who didn’t know what to ask for. They asked for all the wrong things if they asked for anything. We, the vendor team, had 75 pages of pre-approved contract addenda that they could have gotten just by asking. The customers we respected were those who were prepared and came right at us, knowing what they were negotiating. So I can tell you from first-hand experience, the vendor’s feelings and profits are not the customer’s concern in negotiating.

Ten Truths of Negotiations – Truth #3 & #4

Truth #3

     It is not a relationship of trust. It is not a partnership. Ask your attorney what the definition is for a true legal partnership. For one thing, it involves being liable for each other’s actions. This is not what a vendor contract is about. Read one. It is not a relationship of trust—it’s one of mistrust. It’s a relationship in which the vendor drafts a wonderful document that protects the vendor and allocates the risk to you. If a vendor gets you to sign this contract, it’s good for the vendor. Then a vendor will look you in the face and say, “Trust us.”

     That’s the time you should be asking yourself, “Have they shown any trust?” The answer is a resounding no. So get the fantasy that a vendor contract is a partnership out of your head. It’s not a relationship of trust but that doesn’t mean it’s a terrible thing. We have a tendency to let our guard down the minute we think of a relationship of trust. I believe that there can be a good, professional relationship with a supplier, but not a partnership.

     I’ve heard customers say, “We’re partnering with them.” When a client tells me that, I say, “Could I see your partnership agreement?” I was amazed when one client actually showed me one. It was the one true partnership between a customer and a vendor that I’ve seen in the last ten years. Let me assure you that 99 percent of the time it’s not a relationship of mutual trust.

Truth #4

     Are we acquiring results or resources? My next truth is based on this question. It’s a question that must be answered the first day, in any deal, and it has to do with responsibility. Whose responsibility is it to produce the results?

     I’ve been testifying in state and federal court for over 20 years, and almost every dispute I’ve heard revolves around responsibility. In 90 to 99 percent of the deals, responsibility for success is very unclear. Many contract provisions say, “We will decide this. We will jointly accomplish that.” What does that verbiage mean? Who is actually responsible? The bottom line in such wording is that the customer is responsible.

     A “results deal” is one in which the customer has effectively and completely delegated to the supplier the risk of failing to produce the results. It’s the deal where if the vendor talks about “solutions” and “results” to a company’s executives, they are held accountable for service levels and outcomes. That’s a deal where the vendor has the responsibility.

     The other choice is a “resource deal” and, in certain instances, there’s nothing wrong with that. Not every deal has to be a results deal. Sometimes results can’t be defined. What is needed is some horsepower—maybe 3,000 PCs. That’s a resource deal. However, applying those resources and getting the desired results is the customer’s responsibility. These are the cases where that customer needs to pay attention and really manage the resources, the vendor and the outcomes.

     Let’s go back to a results deal for a moment. There are a couple of related and salient points that we tend to forget. We say, “Okay, we have them committed to ‘results.’ But we’re going to manage the deal. After all, we’re risking our money, our assets and our project.” Think about that. What are we really doing? That approach shifts the responsibility for results to the customer.

     Another thing we say is, “We have them committed to results, but we’re going to tell them the policies, equipment and staffing levels they have to use.” Doesn’t this blow the deal? I’ve seen countless vendors avoid accountability because they were “forced” to do things at the customer’s direction.

     There’s one other important point about a results deal. Never have the obligation to pay a vendor triggered by anything other than the vendor producing the agreed upon results, whether it’s on a milestone basis or completion. If it’s a results deal, why should we have a vendor’s invoice trigger our obligation to pay? Why should we have a monthly calendar event trigger our payment? I’ve seen contracts in which the vendor is to be paid $500,000 per month for 60 months, due no later than the tenth of the month—an unconditional obligation for the customer. That’s a financeable document, isn’t it? The vendor can cash out of that deal in the first month, but say, “Don’t worry. We’ll take care of you for the next 59 months.” There’s nothing better than having a good contract—except having the vendor’s money.

     The first thing I do when I look at an RFP is to determine whether it’s a results or resource deal. Who has the responsibility for the outcome? In most deals I look at, this is unclear. If that’s the case, the customer will never win in a dispute that goes to mediation or to court.

Ten Truths of Negotiations – Truth #2

     Truth #2. Contract and relationship management is essential, even critical. As a matter of fact, I think we’re wasting our time negotiating a deal with a vendor if we don’t plan on assertively managing the contract and the relationship with the vendor. When you don’t, you’ll have rights that go unrealized and get waived. You’ll have people in your organization not even aware of specific results the vendor is obligated to produce. And you’ll have endless other problems.

     Years ago, those of us involved in negotiations used to say, “I’ll be so glad when we’ve finished negotiating this contract. I never want to see it again.” And you know what? In many cases that contract never was seen again. In fact, sometimes the contract couldn’t even be found if someone wanted it.

     Today, experience has taught us that contract management begins during contract development and negotiation. That’s when we build in the metrics, the hooks and the handles for effective relationship management. That’s when we decide how we’re going to manage the contract. We need to think beyond closing the deal; we have to consider the whole relationship and how to manage that relationship. If we’re not prepared to do this, we ought to simply save ourselves the time and not negotiate things into the contract.

     There are three high-level objectives when you manage a contract: vendor compliance, customer compliance and evidence of both. I have some recommendations that go a long way toward making sure that what is supposed to happen really happens. A common response is to develop a summary document for the end users when the contract is completed. That’s a great idea, but I recommend more than that summary.

     Remember that not everyone learns well through reading. And in all honesty, not everyone who should will take the time to read the summary. That’s why I would hold briefing sessions. A contract is a collection of the rights and obligations of both parties. I would present to the end user the rights and obligations and say, “You’re on the front line, the first tier of relationship management. Here are the service levels and how we make assessments.” Educating people on what the contract says and what their roles are is an important phase of the whole process—and for the most part, few of us do much about it.

     Do you know why we’re not good at contract management? I think it’s because we’ve never had to manage contracts. The technology industry grew up on vendor form contracts. And there’s nothing for a customer to manage in a vendor form contract. It doesn’t say the vendor is obligated to do anything. That’s why I’m a big believer in the user form contract—but that’s a separate topic in itself.