Gaining the Advantage in Sole-Source NegotiationsGaining the Advantage in Sole-Source Negotiations
Here's what you need to know to improve your negotiating position even in the absence of competitive bids.
July 9, 2018
It's no secret that at TechCaliber Consulting we believe competitive procurements for network infrastructure and services always deliver the best negotiated outcome. But we also understand that sourcing through a competitive process isn't always practical or possible.
Many companies conduct "sole source" supplier negotiations (i.e., a sourcing that involves only one supplier with no competitive pressure to improve the terms, conditions, and pricing it might otherwise be inclined to offer, even to its most favored customers) for a variety of reasons. We frequently see sole sourcing for mid-term contract renegotiations, negotiations for specific technology products that have no acceptable/desirable alternative (negotiations with OEMs such as Cisco often fall into this category), and negotiations involving the addition of network services to an existing contract.
However, a sole-source procurement should still involve a negotiation, and there are many ways you can improve your negotiating position with a supplier even if there aren't other suppliers around to exert competitive pressure. In any supplier negotiation, suppliers provide the price and terms they believe are needed to close the deal for the services/products you're requesting. Negotiating competitive pricing and terms with the limited leverage available in such sole-source negotiations can be difficult, with suppliers seemingly holding all the cards. But customers have some basic and often overlooked tools available to them to extract better deals from a single provider.
Suppliers negotiating without competition will not necessarily try to rip their customers off, but they do offer different customers an eye-opening range of pricing and terms for the same services and products. The most significant driver for getting a good deal versus settling for a not-so-good one is how well, or poorly, the customer used available tools and leverage to prepare for and conduct its sole-source negotiation.
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Creating and Maximizing Negotiation Leverage
In a sole-source negotiation, the customer must work harder to create and maximize negotiation leverage. That starts with getting the basics right:
Knowing and understanding your total relationship with the supplier -- Complex, multifaceted relationships with large IT suppliers mean that the supplier relationship within the customer's organization is "owned" by multiple stakeholders, financed across multiple budgets and, often, governed by different contracts. Having a full understanding of the total spend and portfolio of services provided by a supplier will help identify pockets of negotiation leverage to use. And know that on the other side, the supplier will undertake an equivalent analysis of its relationship with you, the customer, as a standard practice.
Mastering the details -- Understanding the details of the services for which you're negotiating is crucial. This includes knowing information like existing unit pricing and the detailed baseline inventory/consumption of the services in scope for the negotiation. Not having a good understanding of exactly what you're negotiating to purchase is a quick path to a bad deal.
Understanding your existing contract position -- Critical prerequisites to establishing your negotiating position are a clear understanding of the contractual commitments in place for the services you're negotiating to purchase; the relative status in satisfying those commitments; the period of time before the existing contract expires, and the options available to you at the time of expiration (such as contract renewal or entry into a so-called "transition period"); the notice obligations that apply prior to electing such options; and the specific terms or commitments that apply to individual services. Commercial contract terms such as these directly affect the negotiation leverage you do or don't have, and whatever the terms may be, you're better equipped for the negotiation when you know them in detail. After all, your supplier almost certainly will.
Maintaining a good record of written communications -- In sole-source negotiations, which tend to be less formal than competitive sourcing processes, you can too easily fall into the trap of inadequately documenting the negotiation back and forth in writing, a failure that inevitably leads to avoidable misunderstanding and delays down the road. Accordingly, critical best practices to follow are requiring that suppliers submit proposals in writing (specifically, detailed offers that set out all the unit pricing and all associated commercial and legal terms, not merely PowerPoint decks generated by their sales or marketing departments that present an overall price reduction), providing your proposal feedback in writing, and following up all discussions with a written record of anything verbally offered or clarified by your supplier.
An additional and important best practice prior to starting the negotiation is to set out the basis upon which you're prepared to do business. For example, specify the length of contract term/extension that you're willing to enter into; any commitment that you're willing to agree to (in particular where the existing contract already includes a commitment); and key financial terms that you wish to receive (such as existing credits that you expect to be replenished or maintained and/or one-time charges expect to be waived). This ensures that critical deal attributes are raised early in the negotiation to determine whether they're controversial or at issue; it also helps by providing a deal framework that focuses the parties' effort, rather than having too many deal issues, variables, and permutations that needlessly lengthen the negotiation.
Developing a negotiation strategy that accounts for all the preparatory work described above and that will deliver an optimal outcome is also imperative. Simply jumping into the discussions without contemplating and planning how to position the negotiation with the supplier, and considering all the various negotiation leverage points mentioned above, won't deliver a best-in-class result.
Strategies that leverage any wider relationship, outside of the specific services for which you're negotiating, and/or present the negotiation as a platform for future revenue growth for the supplier, can be effective. But, importantly, you must also present the implications of an unsatisfactory offer. A supplier that is made to understand long-term implications of an inadequate offer -- i.e., damage to its relationship with you and to obtaining business from future growth -- can generate a more positive focus on the current negotiation. Suppliers know that customers aggrieved over contract extension negotiations or negotiations for new services are more likely not only to use a competitive procurement process in the future but also to move to new vendors. Supplier sales teams are usually motivated to keep their customers reasonably happy, and a customer can leverage this inclination to obtain a better negotiation outcome.
Ultimately you need to demonstrate to the supplier that providing a highly competitive proposal will result in a win-win, whereas an uncompetitive proposal will lead to negative consequences for the supplier's relationship, and business, with your company. How effectively you convey this message has a material effect on the outcome of the negotiation.
Lastly, leverage your executive relationships with your supplier. Having one of your senior stakeholders participate in a session with the supplier executives can be very helpful as suppliers typically react positively when management reinforces the issues and positions that you've been representing. Getting the timing of executive involvement right is important: It's better to call in the executives later in the negotiation when you're down to a smaller set of issues or when you need to overcome an impasse. It's also important not to overuse, because that dilutes the effectiveness.
Continue to next page: Leveraging market intelligence and benchmarking, and more
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Leveraging Market Intelligence and Benchmarking
Negotiating pricing and terms with a supplier is nearly impossible if you don't know what a "good deal" looks like. In sole-source negotiations, suppliers typically open discussions with offers that are priced considerably higher than those they would deliver in competitive situations. So, simply targeting to negotiate a certain percentage reduction from the opening offer is unlikely to result in a competitive price. Indeed, suppliers expect to be asked for improved pricing and will often price that into a bloated opening offer.
But don't make the opposite mistake: requesting pricing and terms that are unrealistically aggressive and not in line with the market. This type of customer overreach undermines your credibility in the negotiation and what the supplier thinks you know about the market for the services you're sourcing. Unrealistic customer demands embolden the supplier to withhold and deny concessions.
Thus, obtaining market intelligence and benchmark data is a key tool to level the playing field for the negotiation. You can find such data from a variety of sources, including industry reports on pricing trends, directional input via relationships with peer companies, internal benchmarks from other supplier contracts, and analysis from market research firms. But for large enterprises that have complex, multifaceted supplier relationships, which makes benchmarking a complicated exercise, most of these sources are of little actual value. Ultimately, a bespoke benchmark analysis from a specialized advisor that leverages real data applicable to similarly sized enterprises will provide the most effective and accurate market intelligence to guide your negotiations.
Suppliers generally react positively to external benchmarking input. They realize that it helps expedite the negotiations, and that a good advisor will help manage the customer's expectations in line with the market, making sure that needless negotiation cycles aren't wasted on customer requests that are unrealistic or unfulfillable. Of course, the supplier may try to undermine the benchmarking input as part of the negotiation and sometimes even try to exclude the advisor from your negotiation, all because it knows that customers that engage external support gain a significant advantage over those that don't. If that happens, consider yourself successful in getting a real negotiation with your supplier underway.
Don't Neglect Contract Terms
Suppliers prey on customers willing to sacrifice flexible commercial terms that protect long-term negotiation leverage and deliver future pricing improvements for short-term cost reductions. For instance, suppliers often present new contract documents or confusing amendments that remove rate review provisions, extend contract terms, and impose inappropriately large, inflexible commitments or sub-commitments.
As a matter of tactic, suppliers often don't present any commercial or legal terms until after pricing has been agreed, presenting onerous conditions late in the discussions at a point when you've already used up most of your negotiation capital. Suppliers often meet any attempt to push-back on the conditions with a vague threat to revisit all the agreed-upon pricing or further delay the negotiation because it supposedly built the original offer around inclusion of those conditions or removal of those customer-advantageous contract terms.
To avoid that distraction, make sure to address contract terms with your supplier early in the negotiation process. Do this both by setting out the basis upon which you're prepared to do business at the start of the negotiation, and by insisting that at the time of the offer the supplier transparently present all terms and conditions upon which it bases that offer. This is equally true when negotiating for new services, and when negotiating term extensions for existing services.
Continue to next page: Anticipating your supplier's negotiation tactics, and more
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Anticipate your Supplier's Negotiation Tactics
Suppliers develop their own negotiation strategies, and particularly in a sole-source negotiation they'll employ a number of tactics to extend an existing contract (where there may be limited incentive for suppliers to cooperate). These tactics include:
Seeking longer contract terms and higher commitments
Adding new commitments that can only be met with orders for new services
Pushing for exclusivity
Introducing new commercial constraints, such as longer per-service commitments (e.g., network suppliers routinely ask for multiyear circuit terms in return for pricing concessions that would never be necessary in a competitive negotiation)
Introducing new "standard contract terms" under the guise of "necessary updates based on industry developments." These are almost always disadvantageous to the customer.
Conditioning offers on removing commercial terms that the supplier dislikes. A prime example is removing or weakening rate review/benchmarking clauses. If a supplier pushes to weaken or eliminate your rate review/benchmarking rights, take that as a firm signal that you have a good clause, and that giving it up would be costly.
Shedding account team support, and then adding charges for reports and standard activities that the account team used to provide as part of the service
Incumbent suppliers' most effective weapon in a sole-source negotiation, however, is delay.
Delay postpones rate reductions and secures concessions because it leads the customer to drop issues with the supplier's offer or contract documents. Of course, suppliers do have deal review boards and committees and other internal procedures that do take time, but don't let them use these processes to their unreasonable advantage in the negotiation. Most customers will have heard the "we can take that request back but it will take time to get an answer" response, which really means "we'll happily take a week or two to get back to you and confirm that the answer is 'No.'"
In our experience, suppliers' propensity to delay and lengthen any negotiation has become significantly worse in recent years. Even relatively straightforward negotiations take far longer than they should, both during the pricing and commercial negotiations, and during the negotiation of the applicable contract documents that follow. Be prepared for that delay, and it won't surprise you. It's difficult for customers to prevent suppliers' delay tactics, especially once the commercial deal is agreed and there's internal pressure to complete the contract documents so that the benefits of the deal can be realized. The negotiation leverage that you've generated and constant executive pressure on the supplier and its turnaround time for offer updates and contract documents are your main weapons.
Summary
The varying levels of competitive leverage that customers have in any individual negotiation has a great deal of influence on pricing levels achieved in their negotiations, but the strategies and tools used in the negotiation are equally important in driving the best possible deal.
Getting the basics right (knowing the details, written communications, etc.), having an effective negotiation strategy, leveraging executive escalations at the right time, having access to market intelligence and benchmarking, and anticipating your supplier's negotiation tactics are all key to successfully negotiating best-in-class pricing and terms in a sole-source negotiation process.
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