There is a bit of art and science in IT purchase negotiations – and it’s important to understand the difference.
The science of a deal comes from data about a vendor’s pricing, discounting and negotiation behavior in comparable deals – providing this information to IT buyers is NPI’s specialty. IT vendors are notorious for charging customers as much as they think they will pay in order to maximize revenues. This leads directly to wildly inconsistent pricing. Real facts about how the offer that’s on the table stacks up against market are powerful data.
The art is how to use that data to achieve a predefined target outcome; how to convince the vendor they will have to reach a certain price or agree to a certain term in order to win the business. There are two reasons why vendors will not come down on price: (1) They claim they are at rock bottom and will lose money if they decrease price (FYI - this is almost NEVER the case), or (2) they don’t feel like they have to. It’s up to the IT sourcing team to find the “art” that forces downward pricing pressure and achieves the targeted deal that the data shows to be possible.
It’s worth pointing out that this is easier said than done for a number of reasons. First is a compressed buying cycle. While it’s ideal to have 12 months to plan and negotiate an IT purchase or renewal, the reality is many deals are done with far less runway. Second is the volume of deals in IT sourcing’s pipeline. Companies are buying more IT at a faster rate and that spreads the IT sourcing team thin. Third is it’s impossible for IT sourcing pros to be experts on every vendor they do business with, especially when dealing with vendors for the first (or second) time. At-bats matter in this game and the odds are against most IT sourcing teams.
So how does the application of “art” and “science” lead to an optimal outcome? Here’s one example. A client recently sent one of our analysts a quote from a vendor that was notoriously stingy – providing virtually no price concessions. Our client was renewing the service for 3 years but had amassed some overage fees under the expiring contract. After some discussion, the vendor was willing to waive the overages, but NPI’s price benchmark analysis revealed that the renewal was priced well over Fair Market Value (FMV) (over $100K per year), which meant the vendor was going to more than make up the overages it was “waiving.”
NPI provided the science – data-driven IT price benchmark analysis – to validate the vendor’s pricing was considerably over FMV. We also provided inputs to the art – recommending vendor-specific negotiation strategies – including inquiring about a 1-year deal so the client could explore other options, which we knew would concern the vendor about potentially losing the business down the road. The client played hardball and told the vendor that they would pay the overage fees and execute on a 1-year deal (whether they really intended to was their secret to keep). Fearing the longer-term consequences, the vendor reduced the pricing to almost match the fair market value target pricing. This was a win/win – both parties got a fair deal.
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