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ITFMA Journal

Tips and Techniques for Getting the Most from Your Supplier Agreement

John Fisher, Chief Value Officer and
Jeffrey Gordon, VP Value Creation, NET (net)

These are edited excerpts from the presentation by John Fisher and Jeffrey Gordon at the ITFMA World of IT Financial Management Conference June 2011

What is negotiation?

"Negotiation is a field of knowledge that focuses on gaining the favor of people from whom we want things,” according to Herb Cohen. Negotiation is the process of searching for an agreement that satisfies two or more parties. An agreement may be reached either through a barter or through real negotiation. A barter allows only one party – the party in a position of power – to "win"; the other party is forced to accept something of lesser value. A real negotiation implies a "win-win" situation, in which all parties are satisfied.

Why focus on negotiation now?

The economic outlook has been gloomy and has forced most organizations to cut costs. IT has been viewed as a large cost center, which increases pressure on IT to reduce costs. Forensic approaches have been exhausted, and suppliers have responded disruptively by increasing prices and maintenance fees, modifying their policies and changing their interpretation of agreements. Negotiations are seen as the number one way to reduce costs.

What are some tips for improving negotiation skills?

Negotiation Tip #1: Ask, don’t tell
Making statements leads to positions. Asking questions builds common understanding. Making statements creates agendas. Asking questions builds trust and leads to win-win negotiation. When you ASK you gain information, and information will provide an advantage.

Customers and suppliers are often misaligned. Suppliers have been trained to do product sales pitches (present the product features and capabilities of their offerings), as opposed to focusing on your business requirements and mapping available solutions (theirs and others) to meet your needs. You need to re-align your suppliers. Manage suppliers to become customer centric and solution focused. Work with your suppliers to help them understand your business issues and insist any proposed solutions will be aligned with the strategic and economic goals of the initiative (or not be presented).

There are two basic strategies for negotiation: distributive and integrative. The distributive approach involves the supplier saying "No”. It involves "positioning” and value claiming by the supplier. It defines your slice of the pie. The integrative approach involves a holistic view of the situation. The supplier says "Yes”. It involves identifying your interests and creates value. It makes the pie bigger for everyone. The distributive strategy is used to maximize the value obtained in a single deal and when the relationship is not important, while the integrative strategy is used to maximize the value of a series of deals over time, and you want to build a long term strategic relationship.

Some of the distributive tactics include:

  • Invisible man: the supplier claims that they are required to check with another party who is not in the room, only to learn that the other party did not approve the deal. There is a "good cop, bad cop” heir about it.
  • High ball and low ball: the supplier starts with a ridiculous high or low opening offer. The theory is that such an offer will cause you to re-evaluate your own opening offer and move closer to the resistance point. The danger is that the negotiation could be halted due to the perception that it is a waste of time.
  • Bogey: the supplier pretends that an issue of little or no importance to them is quite important. Later on this issue can be traded for major concessions on issues that are actually important to him/her.
  • The Nibble: while being close to an agreement, the supplier asks to include a clause that had not been considered earlier, such as a new cost or terms. The amount is too loose for the deal to be broken, but large enough to upset the other party.
  • Chicken: in labor-management negotiations, management may tell the union that if they do not agree to the current contract offer, management will close the factory and go out of business. This is a high stake gamble. Management must be willing to follow through with their threat. The negotiation is turned into a high stake game of chicken.
  • Intimidation or aggressive behavior: this tactic attempts to force you to agree by employing various emotional ploys, usually anger and fear. One form of intimidation is increasing the appearance of legitimacy. This ploy may involve an excessive number of forms or lots of fine print in agreements so you will not question the contract terms.

The advantages of distributive tactics are that they show strength and there is a clear winner and lose, however the disadvantages are that they definitely damage relationships and often elicit revenge or retribution. The best way of combating these hardball tactics are:

  • Prepare, identify bluffing, focus on the important issues, and use the bogey tactic
  • Ask diagnostic questions and suggest alternative packages
  • Discuss the negotiation process – set the ground rules and use the tactics of your choice
  • Leave the room and take a break
  • Use humor

Negotiation Tip #2: Know the BATNA for Yourself and the Supplier
In negotiation theory, the "best alternative to a negotiated agreement” or BATNA is the course of action that will be taken by a party if the current negotiations fail and an agreement cannot be reached. BATNA is the key focus and the driving force behind a successful negotiator. BATNA should not be confused with the reservation point or walk away point. A party should generally not accept a worse resolution than its BATNA. (Source: Wikipedia Encyclopedia) The BATNA is not the "bottom line.” It is more of a "what if.” To know the supplier’s BATNA requires preparation. Remember tip #1 (ask, don’t tell). Know the supplier’s alternatives and you gain power at the table.

Negotiation Tip #3: Lack of Preparation is Perhaps our Most Serious Handicap
IT negotiations are different than other types of negotiations. According to Gartner Analyst Bill Snyder, IT negotiations are more sophisticated. "You can’t put someone who bought pencils into a negotiation with a big software vendor or they’ll get eaten alive.” Customers start off with a subtle disadvantage when it comes to dealing with suppliers. Your supplier negotiates thousands of these deals every year and your team may do one every three years. Know what you are up against. Customers often feel as though they are in control because they have the money. Customers can develop a false sense of security. Suppliers can turn the competition into a skill game and they are generally better at these games than customers. You need to get prepared. Develop cross-functional teams including outside expertise to ensure that you are designing solutions to business requirements, not buying technology and looking for a problem to solve.

A dilemma exists between the customer and supplier due to their conflicting ideologies and competing values as illustrated in this chart.

Issue Customer Wants Supplier Wants
Pricing Low prices High Prices
Terms & Conditions Customized Standard
Deployment of Technology Integrated & Good Use Vanilla
Service Levels Strong Committments No Committments
Services As much as possible As little as possible
Support High Value / Low Cost High Cost / Low Value
Relationship With Binding Authority With the Un-Empowered
References After Success Before Failure
Business Case Managed Forgotten (Never looks back)
Renewals Reflect Current Bound to the Past

When we as a customer have values that are competing with those from our supplier, is it reasonable to assume that our shared objectives will outweigh these completely conflicting ideologies? Search for deal structures where your supplier has shared goals and objectives and believes the split arrangements are fair. If the Supplier benefit can be tied to yours, you stand a much better chance of achieving collective success and long-term sustainability. If the deal can be structured in a way to enhance supplier emotions – all the better.

Negotiation Tip #4: Understand the Process
Regardless of how complicated negotiations get, there are ways to simplify them to their basic core elements. When you can keep things simple, you often perform better. There are only two reasons why we negotiate – to claim value (bigger slice of the pie) or to create value (bigger pie). It is best to aim for creating a bigger pie for everyone.


Copyright © 2011 by the IT Financial Management Association.

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