Category Archives: Negotiations

An Enterprise Software Buying Guide, Part VII: Negotiations

In our last two posts, we discussed the creation of cost models that would allow you to approximate, at least to a well-defined order of magnitude, the total lifetime cost of ownership of the software solutions under consideration, which can then be refined during negotiations to understand the true cost of each proposal put forth by avendor. Today we discuss the process for formulating your objective and negotiations.

5. Define Your Objective

Your objective is defined as a price-performance goal based upon your identified needs, your cost models, your budget, and your ROI expectations. Your objective will be to obtain the solution required to meet all of your key functional requirements, along with as many of your nice-to-have but non-critical functional requirements as possible, at a specific price-point with as much support beyond a minimum level as you can negotiate.

You’ll go into each vendor negotiation with an identified solution blueprint, a support requirement, and a maximum price that you’re willing to pay and be prepared to walk away (and move on to the next solution) at any time if it looks like your minimum objective is not obtainable. This keeps you focussed on your goal and prevents you from getting lost on a vendor led joyride through the backwoods byways which ultimately lead to gator infested swamps.

6. Negotiate Professionally

Traditionally, enterprise software has a lot of margin and even more empty calories. This means that there is usually a significant opportunity to reduce the price through a serious negotiation.

If the purchase is over a million, it’s critical to have someone from procurement lead the negotiation, backed up by the cross-functional team, and if the purchase is over two million, you should strongly consider bringing in a professional deal architect. A skilled negotiator in the enterprise software market can undercut the range every time and save you as much as 40% off of “best-price” on multi-year deals that include significant maintenance and support requirements.

After all, professional enterprise software negotiators are used to the vendor tricks and rhetoric like we have never accepted that price point or legal clause that the vendor sales representatives are trained to deliver at the start of every negotiation. They know when thy vendor is using the “partner” ploy. They know when a vendor is trying to blind you to their failings by pointing out their competitor’s failings. They know that a market quadrant or wave ranking is pointless if the solution doesn’t do what you need it to do at the price point you need it at to get ROI. In fact, they know all the standard stupid salesperson tricks and how to combat them to get you the best deal.

And they’ll be watching out for the Big Lie, which happens when a vendor says “yes, we have that capability” even though they don’t, and don’t plan to, and then price the missing capability ridiculously high in hopes you’ll decide you don’t really need that capability and buy their product anyway.

Tomorrow, in our final post in this initial series on enterprise software buying, we will discuss the importance of carefully reviewing any contract put before you, some common “gotchas” that vendors will try to hide in the fine print, and the secret to long term solution success.

Tired of Yo-Yo Contracts? Fix the Price with an Indexed-Based Model

When markets yo-yo, so do buyers and sellers … and they waste time, and money, doing so. When prices fall, buyers scramble to cut new contracts to obtain better prices and mythical “savings”*. When prices rise, suppliers scramble to exit contracts to get better prices from other buyers. And when prices yo-yo, it’s a never-ending renegotiation dance that does nothing but waste time, and money, especially when there’s an easy way to lock in a contract for the long term that allows both parties to win. It’s called the Price Index(ed) Contract, and in this post I’ll explain how you can lock in a contract that will protect both parties and allow you to avoid the renegotiation dance … which will allow you to focus on more categories and new, and better, cost savings opportunities.

The first thing to do is to build a should-cost model that captures all of the major price components (> 5%, if not > 10%) using current prices, drawn from an index. We’ll use a (hypothetical but representative) cost breakdown for a 30kVA power transformer, since we all need power, as the foundation for our example.

 

Cost Amount Percentage
Steel 1055 34%
Labor&Overhead 620 20%
Misc 560 18%
Copper 530 17%
Oil 215 7%
Transportation 125 4%
3105 100%

 

This tells us that our primary cost components are steel, labor, and copper and that oil would have to to fluctuate 5% to have the same impact as a 2% fluctuation in copper and 10% to have the same impact as a 2% fluctuation in steel. This also says that if our threshold for negotiating a contract is a minimum cost reduction of 5%, that oil would have to fluctuate 70% for us to even consider a renegotiation. Given that rampant runs, like the one which we just experienced where oil tripled and fell back to the baseline in less than two years, historically only happen every few decades, and that labor costs tend to increase rather predictably with inflation, it also tells us that we should only be concerned with steel and copper costs.

There are market based indices for both steel and copper, the CRU is one example of the former and the New York Futures Market is one example of the latter. At least one of them will, on average, correlate to the prices that your supplier consistently plays for steel just like at least one of them will, on average, correlate to the prices that your supplier consistently pays for copper (which depend on their contracts, leverage, and the market(s) they buy from). You just have to agree on one.

Then, you can tie your contracts to the index and word them to automatically adjust prices on a monthly (or quarterly) basis using the impact of market price fluctuations on the should cost model. Since steel accounts for roughly 34% of the cost, if you agree to cost a increase of 1% for every 3% increase in steel cost, you won’t have to worry about your supplier having to choose between reneging on your contract or financial ruin in a bull market and if your supplier agrees to a cost decrease of 1% for every 3% reduction in steel cost, he won’t have to worry about you having to choose between finding cheaper sources of supply or risking financial ruin due to your inability to compete with (unrealistically) high costs. Similarly, if you agree to a cost increase of 1% for every 6% increase in copper price and your supplier agrees to a cost decrease of 1% for every 6% decrease, neither party loses — and more importantly, both parties win. In bull markets, your supplier gets to pass on the raw material cost increase — and only the raw material cost increase (as you both know the cost, no ridiculous mark-ups), and in down markets, you reap the savings without having to go through a long, time-consuming, wasteful renegotiation.

This works for any category you can think of, allowing you to lock in 1, 2, 3, and even 5 year contracts (on non-strategic categories) without having to worry about lost opportunities or overpayments. The only thing you have to do is check the indexes once a month (or quarter) on the date you both agree to “reset” the prices for the next month (or quarter) to make sure your supplier is holding up their end of the bargain. And you can even use this model to take into account financial costs, such as foreign exchange rate assumptions (if raw materials or components are being bought in a foreign currency) or finance assumptions (if part of the product or transportation cost needs to be financed). So build a should cost model and get that yo-yo off your finger.

* There’s no such thing as “savings”. “Savings” is just money you shouldn’t have spent in the first place. (And that is why “cost avoidance” is more important than “cost reduction”, despite the refusal of many old-school diehards to recognize that fact.

Increasing Your Supplier Negotiating Strength

A recent article by Mark Trowbridge in the Supply Chain Management Review covered “seven ways to build your negotiating strength” that should be considered a must read for anyone engaged in negotiations, especially if the relationship with the supplier is not a collaborative one.

  1. Involve Supply Management Early and Often
    This tactic, employed by world-class sourcing groups, will assist in communication and coordination with internal customers.
  2. Differentiate Between Competitive and Collaborative Negotiations
    Competition is a great way to level the playing field and drive suppliers down to market-efficient pricing, provided that there is competition, movement ability, sufficient volume, sufficient time, and a willingness to change. In comparison, competitive bargaining can assist in complex negotiations where you’re “negotiating out of a hole”.
  3. Prepare the Team to Fight the Tough Battles
    As the author notes: 75% of negotiation time should be spent outside of the room preparing data, strategy, and roles.
  4. Empower Negotiations through Factual Data
    There’s nothing more powerful than being able to call out a supplier in a negotiation when you have a well-researched should-cost model that backs up your claim that the supplier should be able to come down 20% if you consent to the volume necessary for optimal production runs.
  5. Negotiate ALL TCO Elements Before Entering a Relationship
    Forget the transportation costs? That’s a shakedown. The holding costs? That’s a shakedown. The disposal costs? That’s a shakedown. The service fees? You bet that’s a shakedown.
  6. Shift the Supplier’s Paradigm
    Even when a supplier thinks they have a deal locked up, it may still be possible to convince them otherwise and create a significant advantage. Starting renewal negotiations early, putting other products or services on the table, and tabling joint development can all play in your favor.
  7. Leverage the Buyer’s Performance
    Use the supplier’s past performance as a lever in negotiating future product or services acquisitions.

And, whatever you do, don’t allow the following mistakes to be made:

  • Letting a supplier know they have the business before the negotiation is done.
  • Creating specifications that can only be satisfied by one supplier.
  • Not allowing sufficient time to complete the requirements.
  • Allowing colleagues and executives “on the supplier’s side” to be involved in the negotiations.
  • Failing to recognize the scope and complexity of a multi-faceted, high-value acquisition.
  • Letting business units make key concessions to the supplier.
  • Allowing “inside information” to fall into the hands of the supplier.

Market Realities and Mind Games in Technology Negotiations (Software Acquisition Insider Tips V)

By Vinnie Mirchandani

Abruptly end a meeting mid-stream to make a point? Make the salesman sweat at quarter-end to squeeze a few extra discount points? Scream emotionally that you are going to report their price gouging to the regulators? Yes, I have used all of these techniques and many more in the negotiations/background deal advice I have contributed to as a Deal Architect. And I’m not proud of any of them.

My ideal way of conducting a negotiation is identifying an empowered executive in each of the competing (finalist) vendors and “signaling” where the economics and t’s&c’s should roughly come in. I would rather finish the negotiations weeks before quarter end and have the grateful sales executive move on to some other negotiation’s set of mind games.

No, I am not a walk over. My “signals” are based on a continuous monitoring of market trends. If you read my Deal Architect blog, I am into disruptive vendors and economics and very critical of “empty calories” in the price and performance of many of the industry’s large vendors. And lest I under play the complexity of the deals — plenty of legal, procurement, financial and, of course, IT folks are typically involved — the “signals” I am talking about are not stuff you can communicate in a 140 character Tweet.

My two favorite negotiation tools — vigorous bid competition and emerging market benchmarks — apply broadly across technology sectors. I will bring in SaaS economics to play into outsourcing deals. Telecom early termination clauses into SaaS contracts. Cloud computing benchmarks of availability and recovery/response times when negotiating support expectations from on-premise software companies. E. European and S. American competitors when Indian competitors only expect to see their peers in competition. On my other blog, New Florence, I am constantly looking for innovations in technology that are a rich source for the “unorthodox competition” I like to bring to negotiations.

The one humbling principle I live by: implementing technology is exponentially more difficult than negotiating it. So, I am constantly pacing myself to get the negotiation out of the way of implementation. It breaks my heart to see some buyers delay a project for months for another 2-3% in savings which should be far offset by the benefits the implementation team could have leveraged in that time frame.

Of course, not every client I work with is willing to be that “innovative”. Often I am stuck with a short “approved vendor list” to run the bid with. Worse, when it comes to renewals, many clients hurt themselves by not considering any alternatives to the incumbent. Some clients have transparency requirements which make my “back-channel” conversations difficult.

And even more so, it is tough to find enlightened vendor executives who accept the concept of market reality. Many are trained to rotely repeat things like “we have never accepted that price point or legal clause“. Unbelievably, many will pull out their quarter-end, blue plate special when I have told them I want to be finished of the negotiation way before quarter-end. Often they will adopt the Letterman version of “stupid salesman tricks” I have written about before. Others will take advantage of your offer to debrief why they lost the deal to try and claw their way back into the deal.

But when the deal is allowed to be driven by market realities more than mind games, I can tell you magic happens. It’s like a well fought chess game. There are rules and time constraints and each side is civil (at least somewhat) to each other.

But more importantly, both sides walk away feeling they won. Or at least tied. And us negotiators can scurry on out and let the business folks get on with making their magic with the technology they just bought.

At Gartner, and since with his sourcing advisory firm, Deal Architect, Vinnie Mirchandani has negotiated or advised clients on over $ 5 billion in software, offshoring, hosting, telecom and other technology and BPO contracts.

Software Acquisition Insider Tips, Part IV

Forego the Escrow (because It’s All About the Data)

You’ll be hard-pressed to cheerily find a vendor who won’t agree to put their code in escrow for you, in case they go bankrupt, and laugh all the way to the bank when they do so. That’s because your average vendor knows that it’s no effort for them and useless for you. Why?

  1. You probably don’t have software developers working for you, and have no ability to do anything with the code.
  2. Even if you do have a couple of developers, who probably spend most of their time doing integration projects and not core development, they’re not going to be able to translate 1,000,000 lines of code — or more — and do anything sensible with it any time soon. It will be months, and maybe years, before they are fluent in the code.
  3. If the software was remotely hosted, it will be a monumental effort to get a local copy compiled, linked, loaded, configured, hooked up, and populated with your data. Monumental. Especially if you need a recent version, because you have no idea how to do this and neither does your team. You could be facing months of downtime before you figure it out, if you ever do.
  4. Even if you half an IT team with a few competent developers, there’s no guarantee that the escrow code-base is going to be up-to-date (many vendors never update the escrow code-base because they know you’ll never check if they do) or that it’s going to contain the documentation you need to make sense of it, if it has any documentation at all!

You’re only safe if you have a stable application installed behind your firewall that your team, or third party system integrator, can maintain or if you’re using an on-demand application that could easily be replaced with one or more competitor products at the drop of a hat.

What you really need is a data availability agreement which allows you to get a complete extract of your data in a neutral format (like XML or CVS) at any time, and guarantees that you will get a complete data extract within 24 hours if the provider stops supporting your product at any time for any reason. That way, you can just switch to a competitive on-demand solution, load up your data, and keep on truckin’.

Is it Software or Service?

Many software products aren’t really software products at all. In other words, there is some incantation that has to be performed by the software vendor, in the form of services, configuration, or other magic, on a regular basis, to keep the software running. In this case, you haven’t bought software, you’ve bought software plus services. What’s even worse is that you’ve single-sourced it. If the vendor goes broke, or can’t deliver, you have no options.

Always ensure that you can procure services from multiple third party vendors, not just from the software vendor. Even better, make sure that whatever magic process the software vendor is performing can be easily transferred to your own staff. If there are special tools that the vendor uses, insist on owning them yourself. If the vendor cannot provide them, or is unwilling to train your personnel to use them, then find another vendor — fast.