The Greek inventor Archimedes is quoted as saying “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” Since negotiation is really a process of movement, a similar concept applies here. Instead of trying to move the world however, you are simply trying to move a supplier – hopefully a slightly less daunting task. A significant part of our work in negotiating contracts for clients hinges on finding ways to create leverage. In this newsletter, we will discuss some of the common sources of leverage in negotiating supplier contracts.
Competition: Who are you including in the process?
Competition is one of the underlying forces in the most successful economies in the world. It can also be an important component in your successful negotiations. Having viable alternatives gives you more freedom to walk away from a mediocre deal. It also changes the calculations for the supplier. If a supplier is at risk of losing the deal to a competitor, their approach may be different. They tend to be more aggressive on pricing and terms because if they lose the deal, they will have nothing – this is particularly true in areas like software contracts or managed services where the initial investment leads to on-going purchases. As a result, they are willing to move the value of the deal closer to their break-even point. Competition also creates a different conversation internally for suppliers. Typically, an aggressive offer from a supplier will go through some type of internal approval before being offered to a customer. A significant factor is those discussions is the position of other companies vying for the business. If there is a real or perceived threat, you will see more favorable pricing and terms from the supplier.
To get leverage from competition, you must set yourself up so you are really willing to move forward with more than one option. This necessitates that there is representation from sourcing/procurement at the very beginning of the process, not at the end. There may be some cost, technology, or timing offset between solutions. You should put yourself in a position to describe the value of the offset and to determine what it would take to make the solutions equivalent. As long as the alternate supplier can bridge the gap in some form, you should be willing to move ahead. Often times, we will see clients who include alternative solutions, but they really have a strong preference for a single solution. Good salespeople are attuned to those subtle messages that communicate a preference and can tell when they have real competition.
Scope: What is being included in the deal?
Although you might go into a negotiations thinking that you are just dealing with a specific item or solution, there are usually other elements that can and should be put into play. You might be able to gain more leverage expanding the scope of the deal and including more value. The obvious way to do this is to buy more product or services from the supplier. For example, we recently had a client that wanted to negotiate a new ERP software deal but they still had a number of point solutions in areas like human resource management, expense management, etc. By including some of those point solutions in the scope of the deal, we were able to gain leverage.
Beyond just buying more, there might be ways to make the deal more valuable. Factors like publicity, joint development on a solution, and access to technology can be effective in adding value to the deal. Before and during negotiations, you should probe for other areas of value and determine whether there is a way to create extra leverage.
Timing: Can you pull-in or push-out the deal to gain an advantage?
It is no secret that you can gain leverage by being able to close a deal at quarter-end or year-end for a supplier. The sales team often has quotas that they need to meet and are willing to give customers extra consideration during these times. There are other situations where you may be able to use timing to your advantage. We have seen cases where a young company wants to be able to show that their technology is resonating in the market and they are looking for early adopters to jump in. Other times, even well-established companies want to show momentum for a certain product or service. You may be able to help them based on your flexibility regarding the timing on the close of the deal.
Summary
Negotiations are a process of movement. In order to secure value for your organization, you will want to influence your supplier to come closer to your ideal solution. If you can create leverage for your position, you are more likely to get the movement you need with less effort. It is all about creating the right environment for yourself and doing your homework so you are in able to take advantage of your leverage. In both our Supply Chain and IT Sourcing practice areas, we regularly facilitate these negotiations on behalf of clients or advise them on approach. Please contact us at info@symphonyconsult.com if we can help your organization.