Getting a better deal

Tips for holding your own at the negotiating table.

By Paul Desmond
Network World, 02/21/00

While there's little question that bigger companies routinely get better deals on network equipment and services, experts say companies of all sizes leave money on the table because they don't understand the dynamics of the negotiating process.

"The vendor is trying to maximize profits and minimize risk," says Joe Auer, president and founder of International Computer Negotiations, a consulting firm in Winter Park, Fla. "The customer is trying to minimize cost, maximize protection, assure performance guarantees, rights, remedies and so on. Too few people realize those are diametrically opposed objectives."

Once you realize that, there are steps you can take to level the playing field.

A good way to start is by forming a negotiating team. Michael Culp, MIS director at Worthington Steel in Rock Hill, S.C., says the team should comprise experts not only from IT, but also from the legal and financial departments. It can also be a good idea to include representatives of the business units affected by the purchase.

Auer seconds that idea and says that, at least for large or critical deals, a team should draw up and prioritize a list of objectives that negotiators will have in hand when meeting with a vendor. That makes it relatively easy for negotiators to trade off objectives, maybe sacrificing Objective 39 in order to secure Objective 18. "That way you know you got a good deal," he says.

The biggest negotiating mistake Auer says he sees universally is customers selecting a supplier before negotiating a contract. "When you do that, you're giving away the vast majority of your negotiating power," he says.

Negotiating a deal completely with at least two suppliers brings two major benefits, he says: You retain bargaining power, and you learn things about the suppliers you can't learn any other way.

In about 25% of the deals Auer helps customers make, the customers say they don't want to negotiate with more than one supplier; they've made their choice and they're sure of it. Auer invariably encourages them to negotiate nonetheless with at least two suppliers. Of those that go along, one out of four end up changing their mind about their original vendor of choice. Typically something comes to light during the negotiation process that turns the customer off, such as a vendor reneging on promises.

"What that means is, had we not negotiated with two suppliers prior to selection, the customer would've made the wrong selection in 25% of the cases," Auer says. "That's a big, big issue."

A simple formula to follow, according to Joseph Baylock, a vice president at Gartner Group, is: long list, short list, final two, final negotiations. "If you've got the time and the staff, the return on that effort is usually worthwhile," he says. The amount of time the process takes depends on the size of the deal, but it should generally take about three months for a company that understands its requirements to finalize a $10 million contract.

Other basic negotiating rules likewise apply, Baylock says, including pooling all volume from various parts of an organization and dealing with the highest-level sales executive you can.

It's also important to negotiate discounts separately for each type of equipment or service, he says, because the cost structures may be different. If you add up all the separate discounts at the end of the process, you'll likely save money overall because you've gotten all you can out of each piece of the deal.

Vendors will typically be more lenient in terms of price at the end of a month or quarter, when they're trying to meet sales quotas, says Ronald Leccese, manager of network and security for Vytra Healthcare in Melville, N.Y. "They definitely will sharpen their pencils for a month-end sale."

In negotiations when it appeared the vendor wasn't going to budge any more on price, Leccese has been able to get concessions such as training. Xylan, for example, agreed to put two of Leccese's staffers through a three-day training course that normally costs about $800 per day each. "We basically traded training for dollars," he says.

Leccese's formula for determining the starting point for price negotiations is simple: "They'll come up with a price, and we'll say it sounds a little high."

Worthington Steel's Culp is another manager who likes to negotiate at the end of a quarter. He also recommends checking out a vendor's financial performance, comparing it to that of its competitors, and pointing it out if the vendor's situation is less than favorable. If the vendor's market share is shrinking, it may be ready to grant steep discounts.

"That certainly was the case with Cabletron," he says of a half-million-dollar service and support contract his firm recently negotiated to cover Cabletron equipment in more than 50 plants worldwide. "We saw its share start to slide against 3Com, Cisco and so on. We negotiated a deal that was between 10% and 15% less than we did the year before."

A key to striking a deal like that is knowing what's possible,says Brett Machtig, an executive vice president at Telwares, a telecom procurement and negotiation firm in Destin, Fla. And at least in telecom contract negotiations, you can't bluff. "You have to know what's possible. You can't guess," he says. "The carrier's typical response is, 'We can't do it.' You have to know not only that they can, but where they have."

Beware of these vendor ploys

Being veterans of contract negotiations, vendors have numerous tactics to try to sway a deal in their favor. A key one to look out for is the salesman who is too open-minded, Baylock says. "If a vendor has a full portfolio of products, they may just ask the user, 'What do you want?' rather than doing a needs assessment and suggesting the best solution."

An offer of free equipment should likewise raise red flags. "Sometimes it's free for a reason," he says, although accepting free equipment is not always a bad idea. "They might be trying to iron out bugs on beta gear or buy market share in certain segments. You have to understand why you're getting it."

Offers of free gear definitely make Culp wary. Hewlett-Packard last year offered him "several million" dollars' worth of switches and hubs in exchange for his signing a 10-year service contract on the equipment. "It seems like a wonderful deal until you look at the costs of their service contracts and their ability to raise prices at will," he says.

(While not familiar with the particular incident in question, an HP spokesperson says that's not the way the vendor does business.)

Another oft-heard pitch from vendors is that they're offering a "partnership," in which they will share the burden of your network implementation.

"If people fall for this marketing ploy and believe it's a true partnership, they're not going to be able to negotiate a good deal," International Computer Negotiations' Auer says. "When suppliers talk about partnering what they really mean is dividing things right down the middle - the customer taking the risk, them taking the money."

A good way to avoid falling prey to such ploys is to include a contract with your request for proposal at the beginning of the process, Auer says. Have vendors respond to the contract, accepting, rejecting or modifying each demand.

"You should even let the supplier know that some reasonable percentage of the evaluation, maybe 25% to 40%, will be based on how well it responds to the contract," he says. "The customer starts controlling the whole process when it does this."

He notes that you should tell each vendor that you're negotiating with at least one of its competitors. Tell each one that you reserve the right to award the contract at any time, without giving the losing vendor a chance to counteroffer.

"The vendor will lay awake nights thinking about how to give you a better deal under those conditions," Auer says.

And don't be afraid to hear the word "no." "If you haven't heard a 'no' or had an impasse, you haven't gotten the best deal," he says.

Likewise, don't be afraid to say no yourself, Baylock says. "I've never bought a car without walking out of the showroom at least once."