The CIO's guide to smarter vendor negotiation

Negotiating deals with IT vendors is never easy, but it is a skill you can learn. Experts in the art of negotiating say it’s important to understand the vendor’s pain points, look out for hidden costs and keep your emotions in check.

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The basic tenets of successful vendor negotiation have changed little over the years. Yet the process remains difficult to master and, for CIOs in particular, is getting more complex.

“A lot of the most effective strategies for negotiation are common-sense ideas, but people don’t execute them in the realities of a difficult negotiation,” says Daniel Shapiro, founder and director of the Harvard International Negotiation Program and author of Negotiating the Nonnegotiable: How to Resolve Your Most Emotionally Charged Conflicts. “Simple isn’t always easy to execute.”

And for buyers of IT products and services, the negotiation of vendor contracts today is particularly charged. “They’re dealing with more vendors than ever before, for more niche services, in trying economic times, and — in some cases — being handed very boilerplate deals for commoditized services,” says Ed Brodow, creator of Negotiation Boot Camp seminars.

The introduction of hosted products and services was supposed to make IT purchasing easier, but “confusion in the cloud era has exponentially increased,” says Tony Greenberg, CEO of RampRate Sourcing Advisors. “Things are actually getting more complex.”

The good news is that effective negotiation is a skill that IT buyers can become proficient at by approaching it as they would any other business-critical process: by taking their time, doing their homework, understanding the perspectives of various stakeholders, relying on data rather than instinct, focusing on discipline rather than emotion, and remaining vigilant even after the contract is signed.

Following are some specific practices that IT buyers can implement to increase their negotiation prowess.

Build a balanced, unified team

“More focus often gets put on managing the external negotiation when the internal negotiation can be as important and as complex,” says Jeff Weiss, founding partner of Vantage Partners, a consulting firm specializing in complex negotiations. In other words, first get in-house decision-makers in sync. “The negotiation between buyer and seller will always be improved by each party’s effecting alignment with other key people and functions within their organization,” Weiss says.

Vendors understand this, says Elgin Ward, executive director of CAUCUS, an association of IT procurement professionals. “That’s why their goal from the very first moment is to identify key decision-makers and get to consensus on their product or service as quickly as possible.”

Before negotiating with any supplier, IT needs to get on the same page with other business leaders regarding core objectives, risk appetite and standards by which to assess deal terms — before a product or service contract is even on the table. “IT sourcing is a team sport,” says Brad Peterson, a partner at law firm Mayer Brown. Deals done by business users alone may be technically unsound. Deals done by procurement professionals alone may reduce costs but disappoint users. Deals done by IT departments alone provide leading-edge technology but often at high cost and legal risk. The best negotiation processes involve IT, procurement, the business user, finance and legal. “Each specialty within a company provides unique value in achieving a successful outcome in negotiating with IT vendors,” Peterson says.

Look beyond the obvious solutions

IT buyers often end up negotiating a deal as an end unto itself instead of looking more broadly at how to generate business value. For example, they might focus on signing an infrastructure-as-a-service (IaaS) deal rather than looking for a reliable platform for running specific software. “Buyers should remain open to alternative solutions and pricing approaches to increase value,” says Joe Pennell, another partner at law firm Mayer Brown. In many cases, certain newer technologies might raise regulatory, structural and other questions that must be considered in contracting, implementation and use, which will have an impact on negotiations. “For example, some terms that protect buyers in a traditional on-premises solution may have little value—or even be harmful — in a cloud-based offering,” Pennell says. A great IaaS deal might be no deal at all if it would transfer data across borders in violation of data protection laws or export controls.

Take a data-driven approach

IT buyers may think they got a good deal if they get the vendor to come down on price. That’s almost never the case, says RampRate’s Greenberg. Customers must go in with a complete understanding of not only price, but other sources of value and cost. Greenberg advises creating scorecards that give an appropriate weight to key issues.

While that discipline is usually available in-house, IT leaders can bring in third parties to help provide a better picture of the market, vendor and contract nuances. “Enterprises buy colocation services maybe once a year and managed services every couple of years,” says Greenberg. “They don’t have the baselines to understand these deals.”

Identify the vendor’s pain points

“The biggest mistake people make is underestimating their own power in negotiations,” says Ward, who’s been negotiating technology deals for more than two decades. Newsflash: Vendors have problems, too. “They’re trying to survive in an increasingly complex and competitive marketplace,” Ward says. “They’re being looked on as commodity providers and faced with the task of convincing customers to pay more.”

IT buyers who understand the vendor’s specific pressures can negotiate a better deal. “If you did your research and understand that their sales are down for the year, it’s reasonable to assume that they need your business,” Ward says. “You have to understand what’s at stake for the vendor. If you think you’re dealing with somebody who has no motivation to give you a better deal, then you haven’t done your homework.”

Maintain competitive pressure

“Everyone thinks their IT supplier is strategic. Everyone has their golden calf,” says Greenberg. But being too attached to a vendor makes effective negotiation impossible. And Greenberg has seen the deals that result.

“Every engagement starts with someone walking in our door, asking for help with their deal,” he says. “They’re not going to switch vendors. They just want to play poker with them and sign a deal in a few weeks. They’re convinced they have no real leverage.” Once Greenberg’s team baselines the bid against a new deal and adds in the costs to migrate to a new vendor, they often find that a vendor switch will lower costs by 10 to 40 percent. “That’s the wake-up call that they’re paying up to 40 percent [more] for being ‘strategic,’” says Greenberg. Once the customer’s anger and confusion subsides, the supplier is typically willing to make adjustments. “Then a healthier relationship begins,” says Greenberg. “Even the vendor is happy because they never wanted to screw the customer and they get to retain them and sell more services to them.”

Don’t give in the moment you get to a price you think you like, says Pennell of Mayer Brown. “You can achieve better results and get to the finish line faster if the IT vendors know that they have competition for your business,” he says.

Engage as humans

While it’s important to maintain competitive pressure on the vendor, there’s little benefit in approaching negotiations antagonistically. “It’s very easy to suit up in those stereotypical roles of purchaser versus vendor,” says Harvard’s Shapiro. “You may end up somewhere in the middle at the end, but that’s not necessarily a good outcome.”

The goal should be a positive two-way negotiation. “The vendor is not the enemy,” says Shapiro. “In fact, it’s in your interest to befriend that person.” Ask questions to build an emotional connection before jumping into talk about costs or service levels: “How long have you worked for Company X?” “How do you like it?” Ask for their advice on how you can achieve a better deal. Appeal to the other party’s status and expertise. “Two minutes of rapport-building is worth its weight in gold,” Shapiro says. “The research is surprisingly clear on this. It impacts the bottom line.”

Moreover, an adversarial approach can have a long-lasting negative impact. “People often assume they can send in negotiators to battle it out, and then worry about building the relationship afterward. This rarely, if ever, works,” says Weiss. “The negotiation creates a history and a context on which future interactions between the two companies are based — even if the parties change. Really good negotiators are skilled at being able to negotiate deal terms that are tough [on the merits] while simultaneously building the relationship with their counterparts.”

Define your bottom line

Brodow advises customers to have three things in mind when entering into negotiations: your best possible outcome, your goal (a deal with which you’d be satisfied) and what outcome you will not accept. Know when you would walk away from the deal — and what specifically you would do instead. “It’s classic negotiation advice,” says Shapiro. “Before you walk in, know what your walkaway alternative is.” The stronger that walkaway, the better the choices you will make in the negotiation, says Weiss.

Pennell advises arming yourself with a checklist of minimum terms and goal terms. “This is a complex project management challenge,” he says, “and can be best addressed with templates and other tools. When done well, those can allow you to generate high value and avoid mistakes, even when working quickly under stakeholder pressure.”

Follow the money — and watch for hidden costs

Time may be limited in negotiations, so focus is essential. Peterson calls the contract terms that matter most the “money points.” They directly affect the success or failure of the business change you’re trying to achieve. “For example, a miscellaneous provision that terminates a license upon any breach by the buyer might put the buyer’s entire business at risk,” he explains.

In addition, cost overruns are common in IT deals. “Buyers should ensure that the pricing mechanism is well-defined and includes ‘all-in’ language to prevent hidden costs,” Pennell says. This requires careful scrubbing of the contract, because the IT vendors’ incentive is to build in future revenue opportunities, says Peterson.

Focus on interests, not positions

Everyone walks into negotiations with a position. The IT buyer wants to purchase 2,000 licenses for a certain price. The vendor wants twice that. Neither wants to budge. But while the positions are in opposition, there is room to negotiate on interests: why the buyer wants the product and why the seller wants to provide it. “You have to look beyond the surface positions for options that might work to meet each side’s interest instead of haggling over numbers,” says Shapiro.

Keep an eye on emotions

Even with the best intentions, negotiations get heated. Someone is rude or thoughtless. “As human beings, we have emotional reactions. But, if you’re a professional, you have to try to keep that out,” says Brodow. “You’re going to have the emotion, but you don’t have to act on it.” Shapiro advises looking out for the phenomenon he calls “vertigo.” “You get so consumed by the difficult negotiation that you can’t see beyond the conflict, and that’s a dangerous place to be,” he says. “The easiest way to avoid it is to identify it when it’s starting to happen and manage it.” Keep the ultimate end goal and purpose in mind. “It’s not about playing hard ball, but smart ball,” says Shapiro.

Know your weaknesses

As humans, we’re wired to repeat the same dysfunctional patterns over and over, regardless of whether or not they serve us. That’s true with negotiating as well. “For the purchaser, it’s extremely useful to know what their typical pattern of negotiating and dealing with conflict is,” Shapiro says. “If I get on the phone with a vendor who’s tough and domineering, do I typically shrivel up and accommodate them or do I push back?” Shapiro says IT buyers should be aware of their ingrained patterns and determine what behaviors they’d like to embrace instead. “It’s important to remember it’s just a pattern,” he says, “and patterns can be changed.”

Never stop negotiating

Once a contract has been signed, the customer often thinks the negotiations are over. The vendor never does. “The vendor has two objectives: to wow the customer with an amazing implementation (which is good),” says Ward. “[But] they now have a license to talk to anyone and start cross-selling and upselling without any ‘meddling interference’.”

Negotiating continues even after the formal contract negotiations are complete, says Weiss. Buyers often have new requests that require negotiating what is in and out of scope, and then defining new services, pricing and service levels.  Even if they don’t, the nature of the provider-customer relationship requires ongoing collaboration — and thus, negotiation — to agree on how to get things done, work through problems and manage expectations.  And, beyond this, the parties will frequently face market changes or uncover other opportunities over time that require them to consider how to expand or shrink the deal. “The contract might get filed [away] once signed, and the formal negotiating team may move on to their next deal,” Weiss says, “but all sorts of critical negotiations continue among many different parties throughout implementation.”

This story, "The CIO's guide to smarter vendor negotiation" was originally published by CIO.

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