While not always optimal, sometimes stopping a deal at the 11th hour is necessary.
Valerie Thompson
Sourcing and Vendor Management Consultant
Brian Bahnsen
Sourcing and Vendor Management Consultant
It hit the CEO’s inbox as committed. The IT team had worked for nearly a year evaluating vendors and negotiating a critical enterprise infrastructure technology deal with a new vendor.
Everyone was ready to get the deal done and get to work.
Last stop, Jack’s signature. As the CEO, he was well-informed about the business needs, the necessity to bring in a fresh partner to help with meeting those needs, and the waning timeline.
Everything was in place for him to sign the agreement as he made his final review to evaluate the terms.
To which he responded, “I’m not signing this.”
Why not?
Let’s first look at the things that were not at issue.
1) The vendor they selected as the winner.
The vendor legitimately proved they had the right technology, process, and people to meet the changing needs of the business.
2) The team’s effort on the project.
They worked hard together to get this deal this far.
3) The price.
The price was within budget.
4) The length of the agreement.
The term was right…3 years met the Client’s IT infrastructure planning requirements, provided fixed costs for the term, and enough time for the organization to implement and realize the benefits of the new software.
Ok, so what was at issue?
TCO (Total Cost of Ownership) and the inherent contract risks. Simply stated, in the event of a material breach by the vendor, there was no remedy for the Client to recoup any part of a 5-year prepay.
The vendor was adamant that the Client either pay the entire term upfront or pay unreasonable finance charges. While the 3-year prepay bought the Client waived finance charges, the pricing was at a low discount level for the size of the deal and the agreement afforded zero protection for this sizable investment.
That’s a TCO issue, not a pricing issue.
And it’s not where TCO ends. The implementation and support services were crucial to the Client success. If the vendor did not deliver effective implementation and support services resulting in a material breach, who would pay for the cost to make a change? And what else should be considered when evaluating the real cost of such risks?
1) Loss of value in the unused portion of the prepay.
2) The added personnel expense to manage an RFP project for a replacement vendor.
3) Double paying for a new solution equal to the lost term of the breached vendor.
4) Legal fees spent to remedy the breach.
5) The increased IT infrastructure risks.
6) The cost of lost or impeded productivity internally and as a function of supporting their customers.
So, where did Jack, and the team go from there? The timeline was now bearing down on them as they were making a change from a legacy vendor.
While they didn’t go all the way back to the drawing board, they had to be prepared that such a scenario could become real for them. It would depend on effective negotiating strategies and the willingness of the selected vendor to come back to the table.
Fortunately, that’s what happened. The vendor obviously had a vested interest in figuring a way forward, together.
With more time and support from Seprio, the team was able to achieve a fair and reasonable agreement that made sense for all parties. The final agreement included annual payments, additional pricing discounts, better contract protections, and was signed by the agreed upon signature date.
So, what are the lessons learned from this story?
1) Embrace the power of “no”.
Be ready to say “no” at any time, especially at the end. “No” doesn’t always mean “never”. It often means “not yet”. At the end of a long project like this one, there is an understandably big motivation to cross the finish line. But if it isn’t right, it isn’t right. A delay or change at this point is less costly than signing up for bad terms.
2) Keep a straight story.
To protect the priorities of the business, be sure that EVERYONE on the team (that could interact with the vendor) is aligned on the overall story, the messaging, and who says what to whom. It’s important to be disciplined in this area…why it’s important for the team and the individual. Also, it is paramount for project leaders to consistently remind the team of this important discipline until the ink dries.
3) Look beyond pricing.
TCO is important. But look beyond even that by considering an outlay of cash as an investment. Why? Because an investment mindset focuses on a return. It focuses on value. And looking for value will inherently help you flush out the dangers to the value.
4) Value executive support.
Having an executive sponsor is not the same as having executive support. Executive support is best defined as a C-suite decision maker(s) who is willing to say no to the deal and back up the business and sourcing team during vendor negotiations. If you are not in the C suite, value the deal as if you were in the C-suite, advocate directly to your executive leader, even consider enlisting someone on the team with no dog in the hunt. You will surely find objectivity in his or her support. And objectivity is paramount to the best outcome.
If you and your team want to get better results in negotiating with vendors, check out SeprioU. For a limited time, there is no fee to enroll. Think of enrolling, not as something added to your already full to-do list, but as an exchange…exchange SeprioU in place of something else of lesser value.