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Global Vendor Negotiation Strategies

Written By: R. Cundiff
Published On: September 11 2000

Introduction

Negotiating a software and services license is a multi-faceted endeavor in which many aspects of the vendors' strengths and challenges should be leveraged to the purchasers' advantage. In order to maximize the value and time spent negotiating information technology contracts, a project negotiator should never walk into a vendor negotiation without a clear plan and a prioritized set of goals. With that in mind, TechnologyEvaluation.COM has developed a two part software negotiation report series articulating proven, best of breed negotiation processes for software, hardware and vendor services.

Within the framework documented below, TechnologyEvaluation.COM has defined 6 global negotiation categories and macro questions that should be combined with the more detailed negotiation tips outlined in its Software Negotiation Tips report. The lead negotiator should review and consider the six categories documented below in preparation for any major technology negotiation. All six are critical individually, yet should always be pursued within the context of the larger negotiation discussion.

  • Selection Process Scope

    Can I add to or subtract from the overall scope of products and services up for bid to lower the overall cost? Can I link necessary purchases to swing the cost/benefit more in my favor? (E.g., If I am purchasing a site license for Microsoft Office 98 and within 12 months we will purchase a new e-mail system. By including server-based network versions of Outlook, can I decrease the total cost of both projects by allowing the vendor to leverage its dominant product line into new sales in a target area of growth?)

  • Product Installed Base

    Can I use the fear, uncertainty and doubt surrounding a product with a limited number of installs to lower the cost I pay as a "pioneer"? Once products achieve a critical mass of installs, the buying community achieves a sense of security knowing that the product has emerged beyond slideware. Until that point, however, user organizations can leverage the industry-wide trepidation at being the first to install a new product.

  • Vendor Financial Viability

    Has the vendor had financial problems in the past 9-12 months? Contrary to technophiles who focus solely on product functionality, the importance of vendor viability in the selection process cannot be underestimated. If the vendor experiences a significant loss in valuation or a cash shortage, the effects on a vendor and its clients can be devastating. For example, if a vendor misses their revenue targets for a given period, a public company loses a percentage of its market capitalization under lowered expectations. To shore-up the stock price, many vendors tap into their cash reserves for a stock buy-back. Lowered cash reserves are typically coupled with trimmed expenses, and revised (and reduced) hiring plans. The next step is a scaled-back research and development agenda, meaning weakened and less frequent upgrades for clients, coupled with decreased service and support capabilities due to hiring and attrition. Clearly, this is not a positive scenario for either the vendor or the client. Helping the vendor to understand the potential risks the organization is taking by selecting a vendor with questionable viability could lead to significant price concessions.

  • Implementation Scope

    How can I leverage the flow of dollars to the vendor in the most advantageous way possible? For example, many application vendors price their business applications according to the number of named or concurrent users on the system. Typically, the vendor prices the license with one cost/employee ratio during initial implementation, with an add-on employee/cost ratio (usually lower) beginning 6-9 months after the go-live date. An organization can leverage this stance during negotiations by modifying the number of initial named users, then increasing the number of additional users 9-12 months after the initial implementation.

  • Vendor Financial Status and Year-end

    Is the vendor nearing the close of its fiscal year? While all hardware and software vendors will tout firm list prices during the negotiation process, this is never the case. When a vendor is nearing its fiscal quarter- or year-end, pressure from investors to hit the forecasted target looms larger than ever, forcing every vendor from a $20B hardware manufacturer to a $10 software vendor to develop "creative" pricing schemes. Users moving through the selection process should whenever possible schedule negotiations to culminate in March, June, September, or December, typically the closing months of a quarter or a fiscal year.

  • Negotiating Using the Systems Approach

    Perhaps the most basic software negotiation tip is to treat the process as a combined system rather than a discrete set of individual point negotiations. The lead negotiator must have a definitive structure in mind that encompasses all three components of a software negotiation - product pricing, product maintenance and vendor service and support. All negotiations should be conducted from two different but related perspectives - an absolute price (the price provided by the vendor in a vacuum) and relative price (vendor price versus its top competitors). The client should be willing to give ground tactically in areas that are known in advance to be vendor sticking points, while using that vendor inflexibility to gain additional strategic concessions in other areas. For example, when a vendor is well known for never dropping its software maintenance fees (Peregrine Systems is a good example), a client can use that information as leverage for reduced product license or service and support fees. In another example, a client could use Oracle's legendary stubbornness in reducing its professional services pricing to gain major concessions on Oracle application pricing.

 
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