The CIO and the fine art of vendor negotiation

“Don’t write about that,” I’ve been told by several colleagues, when I’ve mentioned that I was working on a post about how best, as the senior technology executive, to negotiate with vendors.  “You’ll give away all your tricks!” they’ve said.

Well, actually, no.  Here’s the main trick: this particular CIO doesn’t have any “tricks”, if by tricks you mean ways to outfox the opposition, or anything else that is best kept secret.  In fact, I’m not a natural avid negotiator. I’m not one of those people who looks forward to buying a new car because of the thrill of haggling with the salesperson.  But I’ve learned over the years how negotiations can best be structured for the optimal outcome.  Like cryptography, where greater obscurity isn’t equivalent to greater security, successful negotiation isn’t dependent on tricks or subterfuge.

I’m quite content to tell any vendor or salesman how I go about negotiating, because doing so doesn’t provide them any kind of advantage.  If anything, it’s beneficial to me and my company that all parties in the negotiation understand clearly the basic principles and approach that I’m using; it cuts a lot of the normal gamesmanship out of the equation.

What I’m about to tell you about negotiating actually strikes me as incredibly obvious. Yet, time and again, I’ve come into a new CTO/CIO role and been astounded at the poor technology deals that were cut by the previous executive: inadequate terms, failure to protect both parties instead of just the vendor, unnecessary and undesirable contractual lock-in.  What happened in most of these cases, as far as I can usually determine, is that the executive in charge got swept away by emotional attachment to a specific solution, and tipped his or her hand. Game over: at that point they were putty in the vendor’s hands. I’ve even seen cases where contracts have completely put the vendor in the driver’s seat of actual implementation, including spending authority, to an unconscionable degree.

Make no mistake: vendors are typically much more experienced and skilled in negotiations than most of the technology executives they deal with.  Achieving excellence in negotiation should therefore be seen as a critical part of the technology executive’s skill portfolio.  But, like finance skills, it’s a skill more honored in the breach than the observance.  Your ability to negotiate well can not only protect your company’s long-term interests, but can actually recoup far more than the equivalent of your annual salary to the bottom line. It’s not uncommon for technology executives at even relatively small companies to negotiate deals worth hundreds of thousands or even millions of dollars of capital and operating expense.

So let’s cut to the “secret”. It boils down to this simple principle: give yourself choices. Identify two, preferably three, viable, affordable, achieveable ways to solve your problem or need.  Once you’ve successfully established that viable short list, the power is all in your hands.  If you haven’t fully done that, you’re not really ready to negotiate, so you shouldn’t even start. Power in negotiation comes from not being wedded to a particular solution. Another way of expressing this idea is “always be truly ready and willing to walk away.”

Pay attention here: I’m about to say two apparently contradictory things, both of which are true and key:

1. You need to regard all of the choices on your short list as fundamentally on equal footing, each with its own advantages and disadvantages, but on balance having roughly the same merit as a solution.  Don’t ever go in having already decided which one you really want!
2. Yet, you need to remember that all of the choices are also fundamentally different in their details. For example, one might have 30% greater functionality or come from a more established and stable company than the others, but recognize that this advantage probably comes with a cost premium. The market is generally pretty efficient that way.

Your goal in the negotiation process is to see where you can find “wiggle room” on each alternative’s components (price, terms, features) that will ultimately make one of those choices outshine the other, on balance.  In other words, you are looking to unsettle the equilibrium you’ve achieved in #1, so that one choice comes out on top. And here’s another key: let each vendor know, and remind them frequently, that this is what you’re doing. Usually, there’s no need (or benefit) in letting the participating vendors know exactly what your list of alternatives consists of, but it will suffice that they know that you know that you have choices.

Miscellaneous tips and observations:

• Negotiation, in general, is not simply about money, although that’s certainly a key dimension that can make one of your viable alternatives rise above the others.  Any facet of the deal should be open to scrutiny and discussion: cost, terms, rights to upgrade, SLAs, warranty, etc. You don’t always automatically choose the least expensive option, nor do you always choose the most featureful.

• Don’t ever tell vendors (and believe me, they’ll ask again and again) what your budget is for this project. They don’t tell you what deals they’ve cut when they’ve sold their product to other customers, do they?  Again, the fact that you are actively pursuing other alternatives needs to speak the loudest.

• Remember, though, that your goal is not to hammer down the price so far that the vendor won’t make any money on the deal. You can do that, at times, but it ultimately means that you’ll get poorer service and less attention when you need it.

• Where possible, involve your legal counsel in the negotiations; don’t just bring them in at the end. The best negotiations for me, in terms of viable outcome, were where I had a tight bond and common approach with my legal counsel.

In the end, it’s all about getting a viable solution for your need, at a reasonable price and beneficial terms for all. It’s not really about “winning”; it’s about choosing. Give yourself choices, and in the end, you (and your organization) do win.

Lagniappe:

• Ward Keever, “Ten Keys to Successful Negotiations”
• Martin Ewing, “5 Can’t-Miss Vendor Negotiation Tips”
• Michael Krigsman, “Negotiation Tips for CIOs”
• Peter Kretzman, “More tips for dealing with IT vendors“