The second reference source is customers identified by the evaluation team without assistance from the vendor. This is an important step because by going off the preplanned program devised by the vendor, the team improves considerably the odds of unearthing any adverse information. There are a variety of ways of identifying vendor clients. Although vendor web sites and trade-focused magazines can be helpful, we have found other methods to be the most effective, including scanning Internet job board resumes to determine which clients an employee of the vendor may have specifically
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worked with. If the firm does not have access to these boards, for a small charge most staffing services companies will be glad to complete a brief search for the team.
The vendor-supplied list and the team-constructed list form a master list of references to call. Depending on the size of investment being considered and the depth of the due-diligence effort required, the team should plan to call between two and four vendors from each of the lists. The vendor-supplied list provides contact information, and the vendor will likely prepare its customer contact for the call. In the case of the team-generated list, the team should identify the relevant purchasing decision maker at each potential reference and send a letter in advance of the call, outlining the reason for the call and providing a list of questions in advance. The team should then follow up with a phone call to perform the interview or determine whom the contact would designate from his or her team to take the call. If possible, the team should conduct the interviews in person and make a site visit as part of the interview.
The list of questions that the team asks varies from selection to selection.
The team should have a specific list of questions prepared in advance but should also leave time for open-end responses from the reference. Many of the most interesting findings come from the unscripted portion of the interview. The focus is on determining how the vendor has performed for the client both before and after the sale, as well as getting a preview of any key lessons learned during the implementation.
Questions that we have found effective in a reference interview include:
• What products or services did you consider as part of your evaluation?
• What were your key decision criteria when making this decision?
• How did you weight the criteria (what was important to you)?
• What period did (will) it take to achieve a payback?
• When did you make your decision?
• How long did you take to complete your vendor evaluation?
• How was the vendor service after the sale?
• What were the surprises (good and bad)?
• What are the key lessons learned from the selection process?
• Would you do it again?
Final Vendor Selection
Once the due-diligence is completed, a front-running vendor will emerge.
The final selection of the vendor should be confirmed with firm senior management. Following vendor selection, the final steps of contract negotiation and product or service commencement can begin.
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Vendor Negotiation
After firm senior management has approved the project and vendor selection, 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 participate in pricing negotiations every single week. The vendor manager does not have the advantage of either practice or complete information. Thus, vendors 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 pricing drivers, or unwillingness to push back on the vendor sales representatives. 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 manager and asked whether this was the best pricing available. The sales manager 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 portion of the negotiation into a major win on another piece. Therefore, the vendor 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 negotiations for a variety of large-scale service and product purchases. Key points
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are provided in the following listing. However, we highly recommend the engagement of a negotiation expert for large-expenditure items or, at a minimum, 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 components throughout the negotiation process. The opportunity for vendors to obfuscate the true pricing is high if a dozen separate items are negotiated 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. Further, it is possible that the negotiations would produce pricing concessions 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 vendors 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 concessions. 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
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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.