Before sitting down at a bargaining table and launching a plan to squeeze a vendor for a low price, IT managers should make sure their bargaining position is a solid one. And forget about stepping away from the table having beaten a vendor into submission. That tactic could backfire.
IT managers should remember that, even though you have some control as a buyer, you should be careful how you use your position. A purchase negotiation session should end with both sides smiling. It is important for IT managers to look at the negotiation process from the vendor's perspective and prepare for the negotiation session by asking a set of key questions.
Vendors need their margins
If every buyer nailed a vendor to the wall over prices, vendors would quickly be out of business. So remember that a vendor needs a profit margin, especially if you’re buying hardware, said J. Howard Highsmith, the president of Sales Methods Corporation, a management consulting firm in North Carolina. “There’s no profit in hardware,” he said.
Highsmith explained that many hardware components like monitors and servers are commodity items. This essentially means that some hardware products are readily available and cost less than they did when first introduced.
Michael Levin, the director of IT at DataVox Technologies, a vendor-independent technology management organization in New York, had this advice for IT managers. “They’ve got to understand that this is a win-win situation. By putting this company out of business, that’s not going to help them in the slightest. So going for the best deal is one thing, but still you’ve got to leave these guys some margins,” he said.
But vendors for these items are a dime a dozen, and if you need commodity items, it’s all right to tell a vendor you’re shopping for the best price.
“If it’s a commodity…like a telephone switch or a computer or something like that, you can compete it,” said Hal Van Horn, a CFO with Tatum CFO Partners, LLP, a nationwide partnership of senior-level IT professionals.
“It’s worth spending the time competing it. (Let) the vendors know that you’re competing it,” he said.
Vendors can bite back
Hitting a vendor below the belt during bad times can cause managers serious headaches when vendors catch a sales upswing. For example, if you hardball a vendor during a price negotiation, don’t expect the vendor to rally its troops when you have a problem. “What happens is, when something gets critical and blows up in the night, you find that someone is not available,” said Highsmith.
Also, don’t expect a vendor to be as submissive about prices as they were when times were bad. “When it’s a good time for the vendors, everybody wants their product. They can just charge you list and walk away and not have to do anything for you,” said Van Horn.
Questions to ask before contacting a vendor
Just because you don’t want to be too hard on a vendor doesn’t mean that you accept a deal with negotiation. Vendors know you want the best product for the best price. Don’t force the issue, but don’t apologize for trying to get the best deal. “If I’m an IT manager, I don’t think I (have to) offer anyone an excuse for wanting to get the best price,” said Highsmith.
He suggested that if managers want the best deal, one that’s good for both parties, they should be prepared before a price negotiation begins. Here are some questions that will help you prepare:
- What deliverables does your organization expect? Write these down, define them, and ask a vendor to identify precisely which ones they can and cannot meet.
- What can you live without? Take the same list of deliverables and form it into two: one of deliverables you must have and ones you could do without.
- What is the scope of what you need to accomplish? If you’re buying a service, determine exactly what you need from the vendor.
- When will you pay? Establish a payment method that both parties can agree to up front.
- What will the help desk team have to do to support the new hardware/software?
- What is most important to the company? Is it price, a good service level agreement, vendor support, etc.?
- What response time can you live with? Do you need coverage from a vendor 24 hours a day, 7 days a week, or will a response time of an hour suffice?
Highsmith stressed that checking a vendor’s references is another way to prepare. When you do, remember that no vendor is perfect. Instead concentrate on the “buts” that surface in a conversation with a reference. For example, if a reference tells you the vendor does a great job but its network engineers are smug to users, it’s not a reason to write off a vendor. “Measure the buts,” said Highsmith and decide which ones you can live with.
More on vendor relations
- "Establish proper vendor relationships using this download"
- "Managing the vendor relationship: Pricing static, but more support help is available"
- "Vendors and the limits of partnership"