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!

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Work out details later? No! Now!

By Joe Auer

Suppliers often skillfully avoid tougher service-level guarantees by convincing the customer that service-level agreements (SLA) should be negotiated after a 90-day transition period. The supplier convincingly argued that service levels could be better determined once it understood the customer’s operations.

Suppliers suggest that the two sides work together to identify service levels during the transition. The customer many times falls for this, believing that information gathered during the transition period would produce more favorable SLAs. The customer signs a contract with no specific SLAs, no “out” clause if the two parties failed to agree on service levels and no recourse if the supplier failed to perform.

And guess what usually happens! At the end of the transition period, the supplier is willing to sign only a few weak SLAs with no remedies. For example, the supplier agrees to make applications “generally available” and that help desk calls would be answered “as soon as practical.” As you might suspect, the supplier escapes accountability with these “commitments” because no one could agree on what those terms really meant. As a result, the customer ends up with a multiyear contract that heavily favors the supplier.

To avoid this kind of mess, start with specific SLAs and remedies in your request for proposals. Let a qualified supplier perform due diligence of your operating environment under a nondisclosure clause as part of its preparation before making its proposal. A supplier’s bid should be based on your required SLAs, which should at least match the service you are currently receiving. In most cases, the SLA should exceed the current levels because you’re considering services provided by “experts.” The key is to specify desired service levels up front, early in the supplier evaluation process.

The critical error is signing a long-term contract without agreement on a fundamental issue – service quality. With a signed contract and no SLAs, a supplier won’t be motivated to guarantee exemplary service, only a minimal quality commitment that would leave the customer without meaningful recourse for unsatisfactory service.

JOE AUER is president of International Computer Negotiations, Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates Professionals on IT Procurement, Sourcing, and Vendor Management. ICN sponsors CAUCUS: The Association of Technology Procurement Professionals. Contact him at joea@dobetterdeals.com.

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.