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Written by Mark Jewell

In a previous issue of FUMSI, I discussed the essential processes of preparation required for effective vendor and contract negotiation. So let's look more closely at negotiation. It's a skilled art and tends not to be one of our profession's favourite tasks. But if you have followed the guidance in the previous article, it will be easier and you'll have information and background to enable you to respond and counter proposals as well as an understanding of what your opponent is trying to achieve.

The top five rules

There are some basic rules - here are my top five:

• Don't waste your time or the vendors if you are not serious. Set expectations - you might want to take a look now because you have time, but make a buying decision in six months if, say, a new business has got off the ground.

• Negotiate in good faith. Vendors and purchasers want to think that it has been an open and fair process. You win some, you lose some but they'll want to believe they all had the same opportunity. You never know when you may want to go back to the vendor so always try to finish on amicable terms. You may need their help, or they may change jobs and become responsible for a product where good vendor relations are critical.

• It's not personal. You represent your organisation, they represent theirs. It's not about you and, although it's nice to get on, it's not essential.

• Get buy-in before you start. Make sure all stakeholders are informed. Have you got budget and permission to spend it? Are you allowed to negotiate? Are other users and internal clients on board? If not, you may have to make an embarrassing withdrawal down the road.

• And lastly, inducements: no lunches and no tickets to Twickenham or Wimbledon before or during negotiations is a good rule. Many companies have their own policies so make sure that you know yours.

Getting a good price

Getting a good price is important, so leverage competing vendors. Let them think you have a choice to force an improvement in terms. But price is not the only issue, so pick the right ones to negotiate on. Some vendors have a lot of flexibility over price, some don't.

Subscription agents work to very thin margins and have little price flexibility, so don't flog it to death. If you can't change the headline price maybe the vendor can throw in something else that adds value to you and doesn't cost them anything, like extending access to other offices or improving support levels.

Don't be rushed, but remember that salespeople have targets and commission to earn, and month, quarter or financial year-ends can be great times to exert a little extra pressure to improve terms. Prepare to give and take: if the vendor makes concessions, what might you give them that doesn't cost you too much but makes them feel they've got a good deal in return?

Think about what's important to the vendor. Growing the account? Getting more sales leads? Are you a new and prestigious client? How can you monetise that? Perhaps by offering to let them use your name as a client in their promotional materials? Do you have a lot of users who go to other places? This makes you a good marketing tool for the vendor. Can they use you as an entry point to target other groups in your organisation?

Try to maintain the initiative and keep them on their toes.

Don't give away information needlessly. I worked with a very bright equities analyst on one deal who knew everything about his industry and nothing about negotiation. His unbridled enthusiasm for the product costs us thousands and fatally undermined our attempts to get a better price. I can think of great products that we think are fantastic value, but I wouldn't dream of telling the vendor.

Be creative and come up with the ideas that might get you where you want to be. Keep the vendor guessing, and on the back foot, so they have to respond. Think through all the ‘what-if' options that might come up and have your answers ready if the vendor puts them forward. Will they work for you or not? A good vendor will do this too, but many don't.

Contract law

Contract law is one of the cornerstones of western business. The small print is legally binding, and what everyone reverts to if there is a dispute, so it's really important to know what you are doing and seek advice if unsure.

Firstly, a practical tip. The small print often is just that: small and hard to read, blow up the document in a photocopier to A3 size - it will be much easier to read as you review these points. The first thing to remember is that the contract will be written to protect the vendor's interests, not yours. You don't have to accept it and you should argue for the changes that will protect your organisation's interests. Use your legal and procurement people if you have them, make sure you know who has authority to sign contracts otherwise they may be invalid.

But if you don't have expert help, here are some common clauses to look out for.

• Roll-over clauses. These automatically renew a service at the end of the term unless you positively cancel before the notice period. Insist that they are removed or issue a cancellation letter at the same time as signing the contract to get around this.

• Assignment or change of ownership clauses. You might want the opportunity to cancel a service if the ownership changes, especially if the new owner was a competitor. Insert a break clause to do this.

• If the company fails to provide a service, or goes out of business, will you get a refund? A service level agreement can help keep the vendor up to the mark.

• Price rises should, to some degree, be predictable. Are they capped or governed by a formula to achieve this e.g. at no more than the RPI increase each year?

• Look out for the sneaky clauses e.g. those which seek to draw in extra users at no cost in the first year, only to charge full price in following years. These can be very expensive so be wary.

And, remember, some things are non-negotiable. Vendors will always disclaim responsibility for costs or errors that occur through customers' use of their data because it's a completely uncapped risk and liability could potentially bankrupt them.

Consider how you future-proof the document. What happens if user numbers grow, other departments or users in different countries want access? What if you outsource work? Can the outsourced users have access? What about guarantees about service uptime, helpdesk availability etc.? Are there restrictions on data storage and transmission that might now or in the future inhibit the growth of your business? It will always be easier and usually cheaper to resolve these issues in the initial negotiation rather than later when the vendor may see it as an opportunity to levy additional charges.

After the negotiation

So once you've agreed upon a price, negotiated and signed a contract, and got the service installed, what happens on Day Two? Make sure you get a countersigned copy of the contract returned to you. Keep it safe; you or your successor may still be referring to it years from now and it will need to be reviewed in the event of a dispute. Deal with that roll-over or evergreen clause - send a letter of cancellation right now. Update your calendar for renewal dates and notice periods to ensure that you don't get caught if you don't want to renew.

And on Day Three, start preparing for next year.

Keep track of helpdesk, update, data quality, and other issues. Does the vendor do a good job? A good vendor will call you regularly but, if not, you should make sure they know how it's going.

Flag problems and get them rectified during the course of the year. Vendors will not thank you for saving them all as a surprise for the renewal discussion. If problems are raised but not properly resolved, this will strengthen your position when it comes to renewal.

Get regular usage data. Is it what you expected, too high or low? Does it suggest there will be large price changes next year? How does it compare to other products?

Canvass your users' opinions while it's still new and fresh in their minds, and yours. No-one can remember things a year later, its just part of the routine by then.

Document all this and keep records. We have a folder for each vendor with the contract details, usage data, problems and other files kept all together - it's invaluable.

And finally, having concluded the deal, you can gracefully accept the vendor's invitation to lunch somewhere nice - you will have earned it, but make sure you are within your company policy and the venue is broadly appropriate to the value of the contract.

Mark Jewell is currently Director, Global Offshoring within Lehman Brothers Corporate Services Division. He was previously director of Business Information Services and responsible for the creation and management of the firm's non-real time data programme.

Related Links

• Managing Successful Vendor Contracts - Part 1
• Product Evaluation Report and Tool Kit
  

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