How To Negotiate Reduced Prices

Kurt Marko

9/22/2009

Budget cuts are common for most IT departments during this “Great Recession,” with more possible in the coming year. Already overworked and understaffed and facing usage demands that don’t seem to reflect business conditions, some IT managers are looking for ways to make suppliers and service providers share in the pain.

“There’s always a trade-off between what we call ‘grief avoidance’ and price, and I think in better times, IT departments will try to minimize grief as opposed to price,” says Andy Woyzbun, lead analyst at Info-Tech Research Group. However, with today’s constrained IT budgets, his clients are more concerned about pricing.

But the economy has been equally tough on vendors. Brian Christopher, president of Negotiation Points, a company that helps in IT contract negotiations, says that although business conditions have made it difficult for vendors to cut prices, they also can’t afford to lose valuable customers, which makes it easier to renegotiate existing contracts.

Conditions are ripe for IT to improve the terms of both new purchases and existing contracts. But Suzanne Harris, a former vice president of the contracts department at a major financial institution, cautions that not all vendors are hurting. IT managers need to understand their competitive situation before assuming a discount.

Key Strategies

Contract negotiation is a professional discipline, requiring specialized technical knowledge, especially when dealing with such a complex set of products and services as IT. But experts unanimously stress preparation as the key to success. Harris says “90% of negotiation is preparation; only 10% is execution.” Preparation comes in the form of market reconnaissance and understanding.

The first step in a successful negotiation is a needs assessment, in which you gather requirements and specifications, Info-Tech’s Woyzbun says. He notes that upfront homework helps set realistic pricing expectations and informed contract terms, and it helps identify areas that are must-haves vs. nice-to-haves.

After assessing your needs, it’s time to do some shopping. At this stage, it’s essential that you understand the products, available options, and competitive market. “The people who are successful in negotiating price reductions have taken a look at market pricing or the price of equivalent products,” Woyzbun says, with the necessary research to “approach a vendor and say ‘everybody else is charging 15% on software maintenance, how come you’re charging 18 or 22?’” He adds that even with commodity products, “If you can point to competitors that have a lower price, that gives you a fair amount of leverage.”

Woyzbun notes that some vendors are notoriously stubborn on pricing. However, there are ways to eke out savings even with these tough cases, such as going through a reseller rather than buying direct, or by seeking contract extensions or other optional services. Ask preferred vendors to suggest creative cost-cutting ideas. For example, some may be open to contract concessions such as added maintenance and support services or longer contract periods for the same price.

Vendors are generally more amenable to price reductions if they see potential new business. Woyzbun says one successful tactic is consolidating spending to increase the value of the relationship. Likewise, if a survey of end users unearths problems, such as a vendor not meeting agreed service levels, response times, quality of service, or otherwise violating contractual requirements, Woyzbun advises using these as negotiating leverage.

Playing Hardball

Sometimes there’s no avoiding hardball negotiating tactics. A customer’s ultimate leverage is walking away from a deal. But Woyzbun says ultimatums should be used cautiously and only after doing enough

background research to ensure pricing demands are reasonable. Harris advises using some empathy to see the situation from the vendor’s perspective: Understand their motivations and always be tough, but respectful.

Another popular technique is playing good cop/bad cop, where one member of the negotiating team is sympathetic with the vendor and another hostile and unyielding, pressing for the most favorable terms. Also, customers may escalate pricing disputes to the vendor’s sales executives, going high enough in the management chain to reach someone with the authority to make substantial concessions.

Both Harris and Woyzbun say a subtle, but often successful, technique is timing the negotiations to coincide with a vendor’s fiscal quarter, when the vendor is often more eager to meet sales quotas.

Pitfalls & Landmines

All experts agree that when haggling, it’s imperative to negotiate from a position of intelligence: Understand the vendor’s competitive pricing environment, its margins, and room for discounts. It’s unrealistic to expect the absolute rock-bottom price, according to Woyzbun. Instead, shoot for the lower quartile of a product’s pricing distribution. He cautions against pushing discounts too far, noting that making unrealistic, “absolutely ludicrous” demands can cause a vendor to believe you’re not serious and walk away from the deal.

Haggling is seldom pleasant, but it’s often necessary to gain the most for your IT dollar. Christopher advises not being shy about discount demands, but to not cross the line where you’re jeopardizing a business relationship. “Everything’s fair game, so press as hard as you can,” he says, but maintain your ethics. The rewards can be great, whether it’s a 10% hardware discount or many times that on a dubious software maintenance contract. It pays to drive a hard bargain.

Article by Kurt Marko for

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How To Negotiate Reduced Prices

Kurt Marko

9/22/2009

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How To Negotiate Reduced Prices

Kurt Marko

9/22/2009

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