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Primer IT Negotiation making practical agreements possible

June 1, 2008

The goal of this post is to help IT Managers:

  • Understand the negotiation process and tactics

  • Identify negotiation opportunities during the IT goods and services purchasing cycle

  • Understand software, hardware, and services negotiation best practices

  • Apply successful negotiation tactics and create win-win situations

  • Streamline the negotiation of product and service contracts

This post will present IT manager with all the information necessary to understand the negotiation process, manage and create successful opportunities, and achieve IT organization goals.

PART 1: BASIC ELEMENTS OF A NEGOTIATION

There is an enormous challenge confronting IT executives who want to get the maximum value out of vendor negotiations. Many companies have realized the value of good negotiations at a project level, but have failed to see it through to the bottom line or annual IT budget. The value of successful negotiation tactics and strategies has been tactical rather than strategic, as most organizations lack standarized guidelines to negotiate contracts and vendor relationships.

The Client and the Vendor

There are negotiations that result in good deals and those that result in poor deals, as well as negotiations that do not result in agreements at all.

Negotiation is the practice of collaborative problem solving. It is usually a process in which two or more parties work together to investigate and develop solutions that may result in an agreement or “deal” between them. This process usually involves a client and a vendor, who have both common and conflicting interests, such as the outcome of a software development project or providing of IT hardware and software.

A good negotiation is one in which the principal goals of all parties are met in a way that benefits all parties involved and improves the relationship between them. In a good negotiation, both sides will leave the meeting with no negative feelings.

Agreements and Conflicts

Negotiation is a principal part of IT business relationships because clients and vendors have different and often conflicting goals. Nevertheless, these opposing objectives keep the marketplace energized by stimulating flexibility, creativity, innovation, and creating change. IT executives that totally avoid negotiations and conflict eventually become unresponsive to change and their organizations suffer.

Conflict resolution and agreements are usually discussed in an informal or formal atmosphere, where issues are resolved as part of the ongoing interaction between organizations and individuals. Ideally, the negotiation process and its individuals involved deal with problems while they are manageable. Early recognition of a conflict or negative condition is critical since those issues can be resolved in the early stages of the negotiation.

Daily Negotiations

During a business day, IT executives participate in numerous situations involving negotiations with vendors, employees, and senior officers. These situations arise when there is a conflict of interest or when one individual’s desire is not really what the other side wants and they both work together to search for solutions, rather than loosing contact and disagreeing. Emotional negotiations can be mentally and emotionally draining. These are typically key employee salary and large contract negotiations.

Negotiations are neither good nor bad. There can be win-win, win-lose, positive, and negative outcomes. The most important aspect of negotiation is not to let conflict escalate out of control. There are many times when IT executives should use negotiations as a critical aspect of creativity and motivation to achieve the business goals of their organizations.

Win-Win Negotiations

Smart executives can identify win-lose from win-win negotiations. Everybody wants to win. The best IT Executives get the best results, while satisfying all the parties in a negotiation. This is the concept behind win-win negotiations: everybody benefits from the agreement.

In a win-lose situation, only one party obtains its goals after the agreement. This kind of win-lose agreements usually last short periods of time and the long-term results are negative. When one party feels that is being neglected, it naturally develops negative reactions against the other party. In addition, it is very easy to negotiate win-lose situations, especially when the client or vendor has a clear advantage.

Win-win negotiations are usually the result of good communication. Both sides need to show flexibility, creativity and teamwork on behalf of the common goals of the agreement. Most win-win negotiation processes are informal and there is no professional negotiator for either side. Both the client and vendor groups are able to sit down together and discuss issues, areas of concern, and try to find a win-win solution.

Tactics for Negotiation

Negotiating is like a game -we use tactics and strategies depending on the situation and the items we are negotiating. Knowledge of the different tactics is key to successfully communicate mutual goals, objectives, and authority boundaries during a deal. There are several factors that have to be considered when using specific tactics. The time factor, such as project deadlines or offer expirations, is a key factor in most negotiations. In this section we are going to analyze the different negotiation tactics IT executives can use for various situations.

The process of negotiation consists of several steps. The process of negotiation usually starts with a discussion with the vendor about the product or service features via fax, e-mail, and/or the Web. Traditionally, the following step in the process is creating a Request for Quote or Request for Proposal, selecting the vendors and providers for delivery, receiving offers, and selecting the best offer.

These tactics can be applied at any step during this traditional purchasing cycle. Once an offer has been received, these negotiation tactics can assist during the process of offer comparison, vendor selection, and contract negotiation. If an offer has not been received yet, IT executives can utilize these tactics to set the right expectations from each vendor that is going to participate in the deal. Finally, these tactics can be used in non-traditional vendor-client negotiations such as employee salary negotiations, responsibilities negotiations and other negotiations that occur in typical work environments.

First Negotiation Tactic: Good Cop, Bad Cop

This technique is named after a typical police scenario. A suspect is apprehended. He is sent to an interrogation room with two police officers, but he is not talking. One of the officers is playing the role of “bad cop.” He shouts at the suspect. He does not let the suspect talk. He is very aggressive. The other officer plays the “good cop.” He stays quiet during the interrogation and, when the “bad cop” leaves the room, he talks to the suspect with a completely different attitude. He becomes the suspect’s friend. The suspect feels better, and trusts this officer. He ends up confessing about his crime.

Business situations are not as dramatic, but the “good cop/bad cop” principle can be easily applied during negotiations for IT goods and services. A typical scenario when this technique can be applied is the following: while the vendor is making the proposal, one of the members of the client team acts very aggressively and insists on completely unreasonable terms. Then, the same member of the team denies any kind of concessions or terms to the vendor. He or she shows no interest in accepting the vendor offer “as is” and leaves the room.

After the vendor reacts to this response, a different member of the client team acts as a “good cop.” He can apologize for the aggressive reaction of the other member and use words such as “I think we can still get to an agreement. We could probably start by working on the pricing section of your proposal.”

But what happens when you are faced with salary negotiations or situations were you are the “suspect” or the proposing party? Normally, you will be faced with two or more negotiators: one is requesting concessions, and the other is more reasonable. Often the “bad cop” does not have to be present at all. The other party will make references to their boss or other team members’ demands for concessions. The most important thing for you is to notice what is happening. Remember, the “good cop” is not on your side. In this situation, focus all your efforts on the “bad cop” and ignore the “good cop.” Since it is the “bad cop” you have to satisfy, it should be his or her interests that need to be fully discovered.

Second Negotiation Tactic: Time

Using time as an IT executive ally during negotiations is another classic tactic. It can be used in many different situations, and it can be used against you on some occasions. Vendors normally limit time during negotiations to force decisions and purchases. The principle behind using the tactic is to take enough time to fully consider an offer.

When considering using this tactic, several things must be acknowledged by both parties. The timeframe to make a decision must be known by both parties, or this tactic would have no value. After that period of time, the offer will normally be withdrawn.

Time tactics also can be used to delay decisions. Delaying the decision making process, and ignoring arguments, counteroffers, and other signs of urgency sent by the other party are all time tactics.

Third Negotiation Tactic: Authority

Organizations assign budgets to IT executives, but most of the time the authority to make the final purchase has to go through the finance department. Anyone that participates in the negotiation process usually has limited authority or decision-making power. Managers report to directors. Directors report to executives or senior officers. Each level usually has a defined set of authority over budgets and associated decision-making abilities.

The ability to approve or disapprove an offer is a great tool for negotiations. Most executives have been in situations were there needs to be approval of their boss to make a decision. When it is appropriate, a recommended approach is to be frank about one’s limit in authority with vendors. For example, during the last stages of a proposal negotiation, you can use words such as “I am not authorized to make purchases over $25,000. Any proposal over that price has to be approved by the Board of Directors. I think the only alternative is to lower your price to $25,000, in which case we could sign the contract today.”

The tactic can be used against our own benefit in some situations. The best defense against this tactic is patience. Do not withdraw from the negotiation immediately. If the situation is appropriate, you will find out that the other party will change it’s tactic or accept your terms.

Fourth Negotiation Tactic: Withdrawal and Ultimatums

This tactic is aggressive, and sometimes unfriendly. There is one thing clear about ultimatums in the business world – nobody likes them. Everybody prefers options and alternatives when negotiating. In a negotiation, there can be several kinds of ultimatums. The most common one is the “take it or leave it offer.”

If neither of the parties can afford or is willing to make a concession during the negotiation, somebody will end up losing. An aggressive climate is created in these situations and the party presenting the ultimatum has to be willing to act immediately to withdraw the offer. People apply ultimatums when they think they have a clear advantage over the other side. Vendors usually apply ultimatums when they know they have a clear advantage, such as a protected sales territory that forces the client to buy from them.

Most ultimatums are made from a fictitious position. If the vendor or other party is bluffing, normally a new offer will be presented after the client decides to quit the negotiation. The ultimatum can be authentic too. Even after trying and quitting the negotiation, the vendor will insist on the ultimatum terms. In that case, the offer has to be rejected or accepted under the vendor terms with no concessions.

Do not let ultimatums get in the way of the IT goals of the organization. Analyze each position, the terms of the ultimatum, and if it is worth accepting those terms. On some occasions, it might make sense to accept the offer. Regardless of the outcome of a negotiation, this technique is used in most negotiations. Do not be intimidated.

The Process of IT Negotiation and the Purchasing Cycle

This section’s goal is to take the mystery out of IT negotiations by explaining the basic process and elements of a negotiation. In addition to providing an overview of what to expect during the process, we will also explore the actual process workflow. It is strongly recommended that your organization get help from the start of any contract negotiation from a consultant who is an expert in IT contract negotiations. Not that it cannot be done without one, but IT executives must realize that the organization is at a disadvantage when an inexperienced staff member negotiates with a vendor’s experienced team of contract negotiators.

Applying Negotiation to the Purchasing Cycle

Negotiating for hardware, software, and services is an intricate process. The entire contract or purchase negotiation process will likely require several months of a dedicated effort from both the client and the vendor. The average duration is between one and four months, yet more complex contracts have been known to require more than a year to complete. The lengthy time requirements are driven by the multitude of technical requirements, business documents, and approvals that must be prepared. The typical IT negotiation process follows six key stages.

Stage Number

Phase

Description

1

Initiation

The client organization prepares a draft primary requirement document or request for quote/proposal based upon advice from business, consultants, and/or the project team about the project’s scope or technical requirements.

2

Exploring Options with Vendors

This is the stage where the parties form an understanding of each other’s requirements, positions and the interests behind those positions. Meetings are held between the parties to identify the debatable issues — including pricing, technology strategic plans, and business goals.

3

Evaluating Offers

After clarifying interests and inventing options for mutual benefit, vendor(s) will develop an offer(s). Vendors will typically start with the highest defensible offer.

4

Managing Concessions

Concessions are revisions of a previous vendor or client offer that has been held and justified. Vendor and client concessions are essential in reaching a successful negotiation.

5

Reaching Closure

Legally, a final agreement is reached and the contract or purchase order is signed and provided to vendor. In a practical sense, a negotiation closes when the vendor and client agree on enough of the terms and details, and are ready to formulate the agreement.

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