A recent study from the Wharton School defines the negative impact of anxiety on performance in negotiations. The full report, which is available here, is quite academic (with charts for “continuous shrinking-pie bargaining task payoff functions” and many references to previous studies). But the title really says it all:
In our experience in IT sourcing, we have seen far too often how the largest IT vendors use their superior negotiating skills and anxiety-free approach to make the deals they want and secure one-sided contract terms. And they are highly skilled at shifting most of the risk to buyers. Anxiety can also be a factor preventing corporate IT leaders from taking full control of their IT projects and partnerships over the long term (the subject of our recent white paper).
Given how many agreements Oracle, SAP, IBM and other top-tier suppliers negotiate every year, it is no wonder they avoid the “Nervous Nelly” syndrome when it comes time to hammer out the final details of contract documents and statements of work. From delivering excessive data points on irrelevant topics, to building massive complexity into pricing and licensing policies, to making every offer a “special offer,” these companies know how to lean on potential clients and existing customers. Collectively, these moves make it very difficult for buyers to validate true discounts. And the overall lack of transparency leads many clients to feel negotiation is something vendors “do to them,” as opposed to a dialogue between equals or a collaboration seeking mutually beneficial agreements.
But when corporate IT leaders and their counterparts in the business come to the table with confidence, the playing field is much more balanced. So how do you bolster confidence in your negotiations? In our experience, the following steps have the biggest impact in reducing anxiety:
- Know what you want: Everyone who participates in IT sourcing negotiations from the client side should be fully aware of the top goals, priorities and critical success factors that must be realized from the overall vendor relationship or the specific project contract. Whatever the goal is – reducing support fees by 25%, supporting 10 new locations or standardizing onto a single ERP instance – everyone should know it by heart, like a mantra. You can be sure that your vendors know exactly what they want from you, even if they won’t necessarily tell you.
- Understand the levers of compromise: In most negotiations, every action causes a reaction. If you push in one area, you can expect pushback in another. For example, if you insist on locking in rates for the future, you may need to start with higher rates today. Strong negotiators and teams recognize these levers and know how to manipulate them to achieve their highest priority goals. In other words, they know when and where to compromise. For instance, they will trade an excellent earned services credit structure for immediate upfront rate reductions, because the latter starts to pay off immediately.
- Do your homework on market trends: There is no substitute for arming yourself with comprehensive market and supplier intelligence. It’s critical to understand the overall market landscape for the software or services you are looking to buy, as well as the latest practices of individual suppliers. Sales strategies evolve rapidly, as new leadership and business development personnel join vendor teams and macroeconomic conditions shift. Similarly, software list prices, incentives and standard discounts can fluctuate significantly from quarter to quarter. Given the highly complex and constantly changing nature of IT business models, prices and sales practices, most companies simply can’t expect to keep up with the vendors who live and breathe the market every day.
- Get current and objective intelligence: Similar to “do your homework” above, it’s not enough to simply gather background information on market conditions and suppliers; you must also ensure that the data is current, accurate and unbiased. Out-of-date information can be more damaging than no information at all. Beware of canned analyst reports from last year or the year before. Your background briefing document must be as current as possible and supported by timely and detailed analysis. Some of the information may be “unstructured” – that is, not publicly available through financial filings. What do the vendor’s most recent deals look like? What’s the whisper on this quarter’s numbers? What is the vendor most motivated to sell today? Is the leadership team in good shape or is a change at the top likely? Lastly, you must be 100% confident in the source of your data and the objectivity of the advice you rely on. Do the advisors or individual consultants providing it have working relationships or financial interests with the vendors they’re reviewing? If so, their insights may not be fully aligned to your needs.
- Learn and practice your lines: Most negotiations involve a little bit of theater. That’s why corporate executives must learn their lines. Like good actors, they must possess great timing, know their cues and understand when to press the vendor with a specific question or line of reasoning. They must know how to respond with strong counters when vendors push back against requests or ask their favorite questions (and they all have their own favorite questions). Further, fully prepared negotiators may surprise vendors into concessions in areas they weren’t ready to discuss. (Sometimes vendors can be overconfident!) Practice may not give you the “perfect” contract, but it will certainly give you more confidence in negotiations. In all likelihood, you’ll also end up with a better, more balanced contract than if you just wing it.
If our suggestions sound like they involve work, you’re absolutely right. Confidence doesn’t just happen. And neither do great contracts. But the tangible payoffs can be huge, not just in terms of ensuring more favorable financial terms up front, but also by establishing the foundation for a mutually respectful, long-term partnership.