<<

. 72
( 92 .)



>>


Vendor Negotiation
After firm senior management has approved the project and vendor selec-
tion, the final vendor pricing negotiations can commence. It is important to
wait until this point to maximize negotiating inf luence with the vendors. If
vendors know the selection has been approved by firm senior management,
they will know that the deal is imminent and will be prepared to rapidly get
to their best pricing.
Vendor negotiation is a complex topic; vendor managers generally find
themselves at a disadvantage in negotiations. Vendor sales professionals par-
ticipate in pricing negotiations every single week. The vendor manager does
not have the advantage of either practice or complete information. Thus, ven-
dors often bring in consultants who are experienced in conducting vendor
pricing negotiations. The best consultants are objective and not associated
with a firm that uses or resells any vendor ™s products. They will also have
conducted a negotiation with the specific vendor in question during the prior
12 months. The high cost of a large-scale vendor investment allows the client
to recoup the negotiation specialist™s consulting fees many times over.
Often, vendor managers have an inherent hesitance to ask for discounting
before closing a deal with a vendor. There are a variety of reasons for this,
including inexperience in negotiating pricing, not understanding vendor pric-
ing drivers, or unwillingness to push back on the vendor sales representa-
tives. This phenomenon can be costly for the company and earn the vendor
manager a reputation for being a patsy. Vendor managers lose nothing by at
least asking the question of vendors. We were asked to review a ready-to-
be-signed contract for a new client as a “formality.” We called the sales man-
ager and asked whether this was the best pricing available. The sales man-
ager remarked that no one had asked for a discount but that he would provide
a 10 percent discount for an immediate execution of the contract. One phone
call, five minutes, and $20,000 in savings was generated.
Because of the variety of factors involved in a large purchase, the vendor
manager must proceed cautiously. Often, vendors will turn a loss on one por-
tion of the negotiation into a major win on another piece. Therefore, the ven-
dor manager must understand and negotiate each variable with a specific
strategy and lock down agreed-on items in the process. Just as in buying a
car, where savv y buyers negotiate a trade-in on a used car, the price of the
new car, and the financing separately, the vendor manager is much more
likely to receive the best possible deal by identifying and negotiating each
point separately. Negotiations can be lengthy, often to the point of annoy-
ance, but time is on the side of the buyer. The vendor manager should tightly
control both the agenda and the pace of the negotiation. This allows the
manager to keep the upper hand and achieve the best pricing and terms.
We have collected a few practices from participating in the vendor negoti-
ations for a variety of large-scale service and product purchases. Key points
425
Purchasing, Procurement, Vendor, and Asset Management

are provided in the following listing. However, we highly recommend the en-
gagement of a negotiation expert for large-expenditure items or, at a mini-
mum, self-study with the negotiation texts mentioned in the bibliography for
this chapter:

• Negotiate each point separately. Vendors are experienced in achieving a
higher total price by bundling and shifting prices of individual compo-
nents throughout the negotiation process. The opportunity for vendors
to obfuscate the true pricing is high if a dozen separate items are nego-
tiated simultaneously. Instead, the vendor manager should carefully
identify and separately negotiate each point, starting with the points
that drive the largest amount of cost first. Often, the vendors will give
up ground on this piece, hoping to regain lost ground on the subsequent
pieces.
• Keep at least two vendors in the mix. Keep a second option open until
there is ink on the final contract; if the vendor senses that it is the only
option, the manager ™s negotiating power declines significantly. As soon
as a vendor thinks a final selection has been made”whether the winner
or not”the vendor ™s negotiating stance will become more rigid. Fur-
ther, it is possible that the negotiations would produce pricing conces-
sions from the second-place vendor that would move it into first place.
• Don™t single-source the negotiation. Because many product vendors
offer a full suite of services in addition to their product, they often
have a natural advantage in proposing consulting or training portions of
a project. The team should still consider competing service providers to
ascertain which vendor can deliver a better price or better service. The
outcome of the negotiations may very well be a single-source approach
for implementation, but driving to this solution early lowers the client™s
negotiating power.
• Timing is everything. Like most companies, product and services ven-
dors are under pressure to achieve monthly, quarterly, and annual goals.
A little research should reveal the fiscal calendar for the vendor in
question. The maximum negotiating power is at a quarter or fiscal year
end, as the vendor works to achieve its financial targets.
• Keep talking to current and prospective customers. Current data from
other prospective customers as well as the installed base can give you
insight into areas where the vendor might be more willing to offer con-
cessions. With the right relationship built, vendor managers from peer
companies will be willing to share costing and negotiation information
about a specific vendor.
• Don™t compare apples to oranges. Because of the large number of pieces
involved in a complex negotiation, it can often be difficult to compare
individual elements of the pricing to adequately compare vendors. The
426 The Back Office: Efficient Firm Operations

team should continue to ask questions and deconstruct vendor-pricing
proposals until they can be compared side-by-side on an element-by-
element basis.
• Nominate a “ bad cop” for your team in advance. The team may occa-
sionally need someone to take a tough line with the vendor. If a “bad
cop” is needed during the negotiations, the firm CFO, corporate coun-
sel, or other senior manager is often happy to fill that role.
• Ensure that the vendor must close the deal. Ensure that throughout the
process, the vendor invests considerable amount of time in the deal; the
vendor sales team then often engages in “sunk cost fallacy” and believes
that it must complete the deal because of the high level of investment so
far. This has the effect of swinging the balance of power considerably.
• Employ “ bogeys” to force reciprocal concessions. This is a common ne-
gotiating tactic to put forward points that are not material considera-
tions (bogeys); then quickly capitulate on the point to force reciprocal
concessions from the vendor on other points. This can be an effective
strategy, but it should be used with caution; it can quickly produce the
reverse effect if the vendor agrees to the nonmaterial concession
early.
• Check the contract for liability limitations. Vendors generally try to
contractually limit their liabilities to the total of their fees or to the
limits of their insurance coverage. These liability limits can sometimes
be far lower than the actual damages experienced by a business if there
is trouble. The team should push for liability limitations that acknowl-
edge the risk for the customer, not the vendor. For high-profile, large-
investment projects, the vendor should also carry malpractice or E&O
insurance from a reputable insurance carrier.
• Never prepay. Occasionally, vendors offer discounts for prepaid services
or products. The vendor manager gives up significant future inf luence
over the vendor ™s behavior by prepaying these charges. We have seen
clients with significant prepaid fees that are worthless because the ven-
dor has gone out of business. However sharp the discount, the risk asso-
ciated with prepaying is too high.
• Know when to disappear. If the sides are at an impasse, the vendor
manager can “go dark” and avoid responding to vendor e-mail and voice
mail; time is on the side of the buyer, and the dearth of information
will put increased pressure on the vendor if the vendor ™s sales team be-
lieves that the deal is slipping away.
• Know when to say when. When the negotiation is close to complete on all
pricing, terms, and conditions, the manager should have at least one final
desired concession at the ready; the vendor usually gives this concession
on the promise that the client will sign the contract immediately.
427
Purchasing, Procurement, Vendor, and Asset Management

Vendor negotiations can be daunting, difficult, and exhausting experi-
ences. However, they are an unavoidable part of the selection process and
have to be managed carefully to ensure the best pricing and terms. As a sen-
ior management acquaintance of ours once remarked, “Every customer gets
the vendors that they deserve.”

Ethics in Purchasing and Vendor Management
Because purchasing often involves large transactions and the vendor selec-
tion process involves often arbitrary-seeming judgment calls, it is critical that
those involved in purchasing adhere to the highest standards of ethics. This
ensures the avoidance of both impropriety and the appearance of impropri-
ety, as well as ensuring that the professional services firm receives the best
value for its investment in outside spending.
Each firm should establish and publish policies for transactions with outside
entities. To avoid any later confusion, these policies should be acknowledged
and signed by all individuals involved in the purchasing decision-making pro-
cess. While each individual firm may set its own specific principles or stan-
dards, the NAPM/ISM has created a good baseline from which to begin (see
Exhibit 16.9).
An additional resource is the Illinois Institute of Technology™s Center
for the Study of Ethics in the Professions (CSEP), which has aggregated a
tremendous number of codes of ethics”more than 850 at current count”
available on its public web site (see the resources section at the end of the
chapter). The CSEP library also includes guidelines and processes for estab-
lishing codes of ethics, resources links throughout the Web, and information
on permissions. This searchable and comprehensive web site is the first stop
on the Internet for those interested in establishing a code of purchasing
ethics or for a broader, firm-wide code of ethical behavior.


Summary
Well-executed vendor selection and management is one of the keys to suc-
cess for the firm overall. Because of high expense outlays and critical re-
liance on vendor-supplied products and services, professional services
firms cannot afford to ignore the topic. The most experienced vendor man-
agers find ways to share the burden of vendor management by instituting
self-monitoring programs, which force vendors to report their own metrics
and results and agree to be subject to periodic random audits of the scoring
and performance. Further, they carefully allocate their attention in propor-
tion to the vendor ™s overall importance to the business. These vendor man-
agers approach vendor relationships with a keen appreciation of the value
428 The Back Office: Efficient Firm Operations

1. Avoid the intent and appearance of unethical or compromising practice in
relationships, actions, and communications.

2. Demonstrate loyalty, to the employer by diligently following the lawful
instructions of the employer, using reasonable care and only authority granted.

3. Refrain from any private business or professional activity that would create a
conflict between personal interests and the interests of the employer

4. Refrain from soliciting or accepting money, loans, credits, or prejudicial
discounts, and the acceptance of gifts, entertainment, favors, or services from
present or potential suppliers which might influence, or appear to influence
purchasing decisions.

5. Handle information on a confidential or proprietary nature to employers
and/or suppliers with due care and proper consideration of ethical and legal
ramifications and governmental regulations.

6. Promote positive supplier relationships through courtesy and impartiality in all
phases of the purchasing cycle.

7. Refrain from reciprocal agreements which restrain competition.

8. Know and obey the letter and spirit of laws governing the purchasing function
and remain alert to the legal ramifications of purchasing decisions.

9. Encourage that all segments of society have the opportunity to participate by
demonstrating support for small, disadvantaged and minority-owned businesses.

10. Discourage purchasing™s involvement in employer sponsored programs of
personal purchases which are not business related.

11. Enhance the proficiency and stature of the purchasing profession by acquiring
and maintaining current technical knowledge and the highest standards of
ethical behavior.

Exhibit 16.9 National Association of Purchasing Management Code of Ethics

of a partnership but also ensure that the vendors are delivering the value
promised. Finally, they ensure that they receive a steady supply of informa-
tion concerning critical vendors from objective third-party sources, includ-
ing other customers and industry research analysts.

RESOURCES
Many of the resources and courses for purchasing are geared to manufactur-
ing companies, which purchase raw materials and finished goods from out-
side suppliers in large quantities, or for federal, state, or local governmental
429
Purchasing, Procurement, Vendor, and Asset Management

agencies that must adhere to strict policies in purchasing process. How-
ever, the same vendor management principles apply to the lower volume
purchasing experienced by professional services firms. Some resources are
provided here:
http://www.napm.org
National Association of Purchasing Managers (NAPM)”recently renamed the Insti-
tute for Supply Chain Management (www.ism.org)”offers a wide variety of re-
sources for purchasing managers, including seminars, books, negotiation advice,
an online knowledge center, and self-paced classes. The NAPM (ISM) confers
two certifications for purchasing professionals, the Accredited Purchasing Prac-
titioner (APP) and the Certified Purchasing Manager (CPM).
http://www.cips.org
Chartered Institute of Purchasing and Supply (CIPS) is an international organiza-
tion serving the purchasing and supply profession. CIPS is based in the United
Kingdom and offers a variety of best-practice information, seminars, and other
services to the purchasing manager.
http://www.amanet.org
American Management Association provides seminars, best practices, and informa-
tion on a wide array of management topics, including purchasing management.
http://www.cmcamai.org
The Canadian Management Centre, an affiliate of the American Management Asso-
ciation, provides information on purchasing management and procurement best
practices.
http://www.american-purchasing.com
The American Purchasing Society (APS) is a professional association of buyers and
purchasing agents. It requires membership and provides subscription to Profes-
sional Purchasing monthly magazine. The APS confers two certifications for
purchasing professionals: the Certified Purchasing Professional (CPP) and the
Certified Professional Purchasing Manager (CPPM).
http://www.pmac.ca
Purchasing Management Association of Canada is an organization providing re-
sources and information for purchasing and procurement managers.
http://www.nigp.org/index.htm
National Association of Governmental Purchasing provides public sector purchasing
agents with training, education, research, and technical assistance.
Illinois Institute of Technology™s Center for the Study of Ethics in the Professions
(CSEP) http://www.iit.edu /departments/csep.

Training and Certification
Many universities, colleges, and other educational institutions offer courses

<<

. 72
( 92 .)



>>