Caveat Venditor

By Steve Gutzman

George Akerlof is perhaps best known for his article “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” published in 1970 – the paper for which he was awarded the Nobel Prize.  In short, it is an article about asymmetric information and the imbalance of negotiation leverage created when one side knows more about something than the other does.  Remember subprime mortgages?

An imbalance of information is exactly what characterized the technology industry for most of its recent history.  The knowledge and ultimately the negotiation leverage were clearly on the side of the vendor.  An IBM mainframe salesperson in the early ’70s described it as “having an 8th-degree black belt in a barroom brawl with a room full of drunks.”  Back then, if you wanted to know about speeds and feeds, connectivity, throughput, pricing, integration, compatibility, and support, all roads led back to the vendor sales office.  It’s no wonder that caveat emptor – let the buyer beware – became such a useful principle and that the perception of sales was aligned with adjectives such as sleazy, slick, greedy, manipulative, and unscrupulous.

The good news is that the tables have begun to turn in recent years, with buyers having access to more and more information.  This certainly applies to the technology industry, but think of all the other aspects of daily life in which information has become more transparent: buying a car, securing a loan, finding an electrician.  A few keystrokes on Edmunds, LendingTree, or Angie’s List can take the mystery out of what used to be a cumbersome and intimidating set of activities.  In fact, there is so much information available that the watchword is now caveat venditor – let the seller beware.

Some studies indicate that as much as half the traditional selling cycle is complete by the time a salesperson learns of a new opportunity.  Today the buyer can easily scope out product information, viable suppliers, sample RFPs, evaluation models, vendor scorecards, checklists, and service-level agreements from the internet with relative ease.  Conference calls with colleagues from other companies, user group meetings, and buyer conferences can also be on the menu to the more determined.  And all before the sales team is called – if they are called at all.  This “new reality,” as one Silicon Valley head of sales terms it, is forcing sales teams around the world to reevaluate how they engage with customers in everything from small-business marketing campaigns to key account sales management.  The selling strategies and tactics of just a few years ago are proving to be increasingly out of date.

However, while having access to more information may take away the specter of the lopsided barroom brawl, knowing what to do with that information is where the high-value payback occurs.  As one insurance industry executive described the rollout of their vendor management office, “This is where the heavy lifting takes place.”

The goal, however elusive, leads back to a principle that even the theoretical economist George Akerlof would agree has real-world value: “fully informed, rational actors making decisions in their best interest.”


Steve Gutzman is a senior advisor at ICN and a 33-year veteran of the high-tech industry.  You may contact him at sgutzman@dobetterdeals.com.

 

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How to Calm Your Brain During Any Storm

How to Calm Your Brain During Any Storm

There is a major storm in our economy currently. Understandably, this situation adds stress to negotiations. When you’re overly stressed the chemistry in your brain changes. Your problem solving abilities are reduced and your judgment is greatly diminished. In fact, it is a very similar state as being drunk! This is no state to be in when making important decisions during negotiations.

Here are some simple steps to take to begin to relax and reduce the effects of stress on your brain:

  • Take at least 3 deep, slow, regular breaths – this will start to slow your heart rate, lower your blood pressure and restore cognitive clarity.
  • As you breathe, let your shoulders relax and loosen your jaw – you may be surprised at how much tension you hold in your jaw.
  • Focus your mind on the present moment – to help with this maybe focus your attention on your breath passing through your nostrils as you breathe, or pick a spot on the wall and focus your eyes gently on that spot. When focusing on the present moment you prevent yourself from regretting the past and fearing the future – both of which increase stress. (For a deeper understanding of this concept, read The Power of Now by Eckhart Tolle.)
  • When uncomfortable feelings arise, don’t try to ignore them but acknowledge and label them – recent research at UCLA proves this allows you to detach from negative emotions so they do not hijack your calmness.

Once you begin to relax your mental clarity will begin to be restored in your brain. Will this calm the outer storm in our economy? No. But it will calm the storm within you and make you less likely to do something irrational during negotiations that you will later regret.

About the author: Jonathan Jordan, a member of the prestigious Society for Neuroscience, is an entrepreneur, Certified Business & Executive Coach, international speaker and ocassionally speaks at ICN conferences.  You can contact him via e-mail at Jonathan@MindfullyChange.com.

Do You Care about the Long-Term?

            A few weeks ago, I wrote about the Senior Manager who bought in to the “We’re Your Partners” supplier ploy hook-line-and-sinker.  Later, I had a conversation with an IT procurement practitioner (our hero) at a major NYSE-listed company. 

            It seems that an executive with his company was hell-bent on signing an agreement with a particular vendor despite the fact that the agreement was not in the best interests of the company.  Our hero explained all his objections and refused to sign off.  Despite internal procedures that require our hero’s signing off on all such agreements before they’re executed, the executive went ahead and executed the contract anyway.  (I can’t wait to see how this works out.)

            These two events got me thinking.  Nowadays, do we care more about short term results than the long-term ramifications of our decisions?  Are our decisions being driven by a “git ‘er done” mentality rather than what’s best for the company?  Are bad decisions being made because people know that it’s unlikely they’ll be around when things start to come undone?

            How are decisions botched in your organization?  How are successful decisions made? Feel free to comment – anonymously of course!

Our guest blogger is Dan Wallace, a staff member at ICN and Caucus-The Association of Technology Acquisition Professionals. For information on the time-tested, best-practice methodology called the Managed Acquisition ProcessTM, contact ICN.  If you have a story worth sharing, please contact ja4@dobetterdeals.com. 

They’re Your Vendor Not Your Partner ~ Revisited!

            You know it’s a recurring theme of this column to take pot shots at companies that insist that their suppliers are their partners.  Well, here’s a true story – the names have been changed to protect the guilty.

            A few years ago, our organization was called in to make a presentation to senior executives of a well-known communications company.  Our Executive Briefing focuses on the role of effective technology procurement in achieving overall business objectives and includes a segment called “The Ten Truths in Technology Negotiations.”  Naturally, one of the truths is your vendor is not your partner.

            The senior-most executive in the room took great exception to that fact and went off on a rant about how all their suppliers are their partners and how contentious and negative we were to even imply that suppliers should be treated as anything but partners…

            Needless to say, we weren’t invited back.  But the story gets better.

            Two years later, we received a RFP from the company inviting us to bid on renegotiating their maintenance agreements.  It seems that they discovered that nearly fifty of their “partners” were overcharging them for maintenance.

            Mr. Senior-most Executive is no longer with the company. 

Our guest blogger is Dan Wallace, a staff member at ICN and Caucus-The Association of Technology Acquisition Professionals. For advice on how to renegotiate your maintenance contracts, contact ICN.  If you have a story worth sharing, please contact ja4@dobetterdeals.com. 

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.