“Here’s the problem,” this consulting client in procurement told me years ago. “We’ve worked with this software company for a long time and our internal clients are pretty satisfied. But its fee just skyrocketed and it’s being really stubborn – no concessions at all.
Plus, our contract expires in 6 months, which isn’t nearly enough time to find an alternative and transition to someone else. What should we do?”
After a full day consulting session with his team in which we developed an extensive Strategic Negotiation Plan, my recommendation included two core components:
1) negotiate a short-term extension based on benchmarks like market, precedent, etc., worst case scenario at the software company’s stated rates; and
2) go out to bid for the longer-term with a Request for Proposal (RFP) and develop good leverage (which they didn’t have short-term as they had no decent alternative, or Plan B, to this software company).
The bigger structural issue, however, was its mistake that led to this desperate situation.
In last week’s column, I described two common procurement negotiation mistakes: a) an overreliance on price and undervaluing of crucial goals and interests, and b) underrating the intangibles inherent in long-term supplier relationships.
Here are two more.
Mistake #3: Starting the negotiation process too late (the timing mistake)
This company waited way too long to start the renewal negotiation with this vendor. And the vendor knew that the later the negotiation started and ended, the stronger its leverage.
This entire negotiation would have been radically different had the company started negotiating 18 months prior to the contract expiration. It could have then sent out an RFP, developed a decent Plan B, and moved elsewhere if the software company unreasonably jacked up its fee and wouldn’t move.
Importantly, this strategy also requires a hard deadline to conclude the negotiation while you still have leverage. With a soft or no deadline, you may end up with similarly weak leverage anyway.
Mistake #4: Judging success based on the sales’ discount (the discount mistake)
I’m sure you’ve heard the following and probably said it yourself many times – “we got a great deal, as they gave us a big discount.”
After all, any significant discount off the initial price means we negotiated well, right? Wrong. This is a psychological trap, and a mistake. And it’s one I’ve fallen for, too.
This psychological feeling is based on our assumption that the initial price is related to fair benchmarks like market value, costs, etc. But this may not be true. Sellers have 100 percent ability to set any initial price they want.
So how should we judge negotiation success as procurement professionals? Do your homework and evaluate it based on:
1) the extent the vendor satisfies your goals, needs and interests;
2) the difference between the vendor’s price/product/service and your Plan B (making sure you’re comparing apples to apples); and
3) benchmarks and independent objective criteria like actual market value, costs, precedent (last year’s price), profitability, an expert’s evaluation, and the list goes on.
Latz’s Lesson: Everyone makes mistakes. But some are avoidable, like waiting too long to start the negotiation and evaluating your success based on the discount you get.
* Marty Latz is the founder of Latz Negotiation, a national negotiation training and consulting company that helps individuals and organizations achieve better results with best practices based on the experts’ research. He can be reached at 480.951.3222 or Marty@LatzNegotiation.com.