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Strategy, Innovation, Leadership and Security

Negotiating with a "bad" counterpart

Behavior, Partnerships, StrategyEdward KiledjianComment

Most of our negotiations with vendors should be amicable and balanced. Once in a while though, you come across a vendor that simply does not want to partner and only sees you as an additional revenue stream. For these rare cases, you sometimes may need to resort to extra-ordinary measures to regain control of the situation.

Take a Step Back

In most situations, if a vendor “feels” that they have won the business even before the official terms are negotiated, they may decide to take a hardline stance. Often times, this is a direct result of a business unit deciding on a product before final terms [with the vendor or reseller] are negotiated.

  1. The first step is to take a step back and re-assess the decision. Can another product or products meet this requirement? If the vendor realizes that you are considering other options, their position may soften.
  2. Another option related to the above point is to work with your internal teams and determine if the requirement can be pushed back or changed. If the vendor sees that the opportunity may be indefinitely delayed or lost, their position may soften.
  3. You may want to go back to the RFI/RFP step. This will give potential vendors a chance to propose alternatives you may not have considered. It also shows the problematic vendor that you are willing to “play ball”. It is important to clearly communicate your requirements. If none of the vendors met the minimum requirements, it is important to let them know this and what they must meet to be considered. Vendors can be very creative.

Use standards to your advantage

Most products or services can be procured from various sources. In an effort to drive up revenues and create differentiation, some manufacturers/resellers try to convince customers to start using the customs features of their products. Commoditization is a customer’s biggest ally. Any time a customer accepts to use and implement vendor specific features, they strengthen the vendors stronghold and may allow it to charge higher prices or force less than optimal terms.

Customers should always try to use standard commoditized products as much as possible. If something has already been implemented and is preventing a commoditized comparison leading to fair competition, the customer should ask themselves whether they can move to the standard feature sets (accepting a slight drop in performance or features).

Another part of this exercise is to work with the operational staff to determine the switching cost of various alternatives. This exercise sometimes shows that the additional cost of switching to another product is better than locking the company into a less than favorable agreement. Other times the company may accept a slight reduction in performance in exchange for removing a product from the IT portfolio.
When working on RFI/RFPs, it is important to always provide your exact requirements (functional, operational, etc) and then ask the vendors to find the least-expensive (TCO not only ICA) way to meet these. Often times this will allow the vendor to propose a better solution that also is mutually beneficial.  In line with this approach, it is good practice to force vendors to provide TCO estimates and challenge them to find ways of reducing it. You can make them financially accountable for reducing TCO by offering them more business as a reward.

Cancel the contract

Unfortunately you will encounter situations where the previous recommendations simply do not work. Although these situations should be rare, you may be forced to take more drastic measures.
If the vendor continually negotiates in bad faith and every other avenue has failed, you may be forced to simply terminate all contracts with that vendor. [It is important to ensure that all contracts allow for termination for vendor underperformance].

This sends a very strong signal to the other party.
In addition to the above, you may want to terminate all maintenance contracts. These are extremely lucrative for most manufacturers and losing this sends a very strong message. You may want to move from a maintenance contract to a T&M agreement. You may also switch from maintenance from one provider to another until the original vendor comes back to the table or you find an alternative solution.

Use competition
Fierce vendor competition always benefits the customer. Often times, vendors will come up with creative ways to meet your requirements. Remember that competition can be re-introduced at any step in the negotiation process. But do not bluff. Make sure you are prepared to follow though on your thread if the vendor calls your bluff.
Sometimes it may be worthwhile to investigate Software as a service if your issues are with a traditional software provider. SaaS is often a very price competitive approach since:

  • There is little to no upfront CAPex investment
  • SaaS providers are competing with the traditional server based vendors and are otten prepared to go the extra mile to win business.
  • Moving to a highly standardized SaaS offering may force you to re-evaluate you  true absolute requirements and may lead you to save tones of money by dropping custom modules.

Use their weakness

Our only goal is to secure the best possible outcome for your company and as such, you may want to use this approach with existing vendors. Go through a vendors complete performance record and determine if there is “unsatisfactory performance” which could lead to termination of contract, activation of penalties or loss of goodwill.  Often times this may serve as a good wake-up call to the vendor.

Do some homework and determine the vendors weak points and or pain factors. This may be the loss of a key logo ( account), bad press, loss of important revenue at the end of a month/quarter/year, etc. It is important to constantly check-up on your vendors market position and financial status. All of these can be strong negotiation points.

All negotiations should be performed in good faith. The techniques described above are measures of last resort and they may harm the long term feeling of partnership.