Negotiation know-how

Minimize risk by delegating the job to a skilled professional and establishing processes and procedures.

In my experience working as a CIO for several big corporations, I’ve learned that creating an effective vendor-negotiation process for everything from licensing models to service-level agreements is critical to maintaining competitive edge.

When I first became CIO at Home Savings of America in 1994, I read contracts every spare moment, even on the ferry on the way to Catalina Island while the rest of the passengers were delighting in watching the dolphins frolicking in the water. That is, until I hired a chief negotiator: Ken Horner, who is now an executive vice president with IndyMac Bank.

For senior management, delegating this responsibility to someone else is not without its risks. However, a chief negotiator who does the job well can get the most out of your IT investments.

Senior managers must have utmost faith in the person or team you designate to handle the negotiations. As a CIO, I often found that vendors attempted an end-around when negotiations didn’t proceed in their favor. They would try to contact me directly or lobby my direct reports to get involved on their behalf. When you put a well-trained and qualified person or team in charge of contract negotiations, resist the urge to roll up your sleeves and get involved.

But how do you know if you have the right person or team handling the negotiations? Good negotiators have done their homework, understand the needs and scope of the particular project or technology, and can communicate both up and down the corporate ladder.

When I hired Horner as my chief negotiator, the first thing we did was establish what we both expected from him and his organization; the structure of his organization; and what he needed to do to stay on top of the vendors. We developed in-house boilerplate language with the attorneys so I didn’t have to review the same contractual basics, nor did the attorneys. We also developed a one-page executive summary outline so we had the fundamentals of the contract readily available for presentation and discussion with the chairman and/or the board.

The CEO, CFO and I agreed on governance issues, such as how much money each management level had authority over and whom it had to go to if we exceeded that figure.

We also developed a checklist cover page with approval levels and signature lines. For example, if a contract was for $10 million and I needed to sign off on any investments of more than $1 million, the project manager, user project manager and any management between them and me would also have to sign off. If the contract or purchase involved a user group, I had my colleague in the user group approve it, too.

Once the logistics are worked out, your negotiator or negotiation group is free to focus on execution. What follows are some guidelines for how to ensure they protect your company’s interests.

1. Seek flexibility and scalability. Things can and do change, so a good negotiator will build enough flexibility into the negotiations to help protect your company from risk and exposure when a technology changes or new opportunities such as VoIP arise.

Vendors often fail to meet their promises regarding scalability. The negotiator needs to make sure the platform will work as your organizational needs grow by building into the contract consequences if certain criteria aren’t met, such as expected response time when volumes increase.

2. Play so that everyone wins. One common mistake many firms make is to beat up a vendor to get the absolute lowest price. If the vendor operates at a loss, sooner or later there will be harsh consequences for your company, especially if the vendor goes out of business. Perhaps you’ll be forced to pay more for every change to the agreement, or you’ll get the shaft on customer service because another client is paying more for the same thing.

3. Take names and numbers. References are a key component of any negotiation. Along with the standard supplied references, the negotiator should ask the vendor for names of companies that had challenges with the vendor (not-so-good references). For both good and bad references, seek out other key decision-makers, influencers and end users within those companies. That might mean talking to the CFO, project manager, user or programmer. Have your respective project leaders and end users participate in the reference checks by talking to their counterparts.

Why do it this way? All involved will glean some lessons from the other company’s experience and mistakes. And your team will be able to build a trusted relationship with the reference company and keep in touch as deployment challenges arise, possibly avoiding costly missteps. And finally, your negotiator will be working from a position of strength by talking to the reference company’s negotiator and will be better prepared to work out the best deal for your company.

4. Manage the life of the contract. Vendor management throughout the life cycle of the contract is crucial. When organizations don’t practice good vendor management, it might be very costly when there is a risk or problem discovered in the later phases. Your employees need to know when to escalate problems to the corporate level or direct reports if a vendor doesn’t meet the standards laid out in the contract. People are often afraid to raise a red flag because they don’t want to be blamed.

Finally, it’s critical to monitor the milestones set in the contract to make sure they’re being met, instead of waiting until the contract comes back up for review two or three years down the road. By that time, you might have poured millions and millions of dollars down the drain on a project or technology that easily could have been fixed or replaced much earlier. That’s when all that work the negotiator put into designing the contract will pay off.

Markle is president of the Society for Information Management, a professional association in Chicago that provides resources and programs to help IT leaders develop their management skills and enhance their business knowledge. She has more than 30 years of experience in the IT and business world, including stints as CIO at Arthur Andersen Americas, Home Savings of America, Fannie Mae and Georgia Power. She can be reached at nmarkle@fielding.edu.