10 Tips For Negotiating with Vendors in a Down Economy

Editor’s note: This is a sidebar to Putting The Squeeze On IT Vendors.

Let’s face it. Up to now vendors have had the home-court advantage. After all, their job is to sell you services — and they do it every day. You may be many things, but chances are you’re not a professional buyer. In the back-and-forth with vendors you’ve probably lost a few rounds.

These days, however, the ball is back in your court. With the economy in low gear, many vendors are eager to relax the hard sell and play nice. Despite corporate downsizing, companies are paying on average 10 percent less for the same vendor services, according to Howard Lackow, senior vice president of the Outsourcing Institute, a professional organization and consulting firm based in Jericho, N.Y. Especially in areas where human resources are involved –such as systems integration and application development– it’s not uncommon to negotiate deals for 20 percent off their price before the downturn.

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Read the main Special Report story, Putting The Squeeze On IT Vendors
to learn about buyers’ strategies in action.

Also read Don’t Overlook Used Equipment Market

The advantage may have shifted to your side of the court, but that doesn’t mean you should smash every serve into oblivion. After all, you still have to collaborate if you want your project to run smoothly, and you don’t want to create an adversarial relationship from the get-go.

A little savvy can help polish your volley when it comes to negotiating with vendors. Knowledge of fundamentals –and a straight face– is the hallmark of an ace.

  • 1. Know the market. The only way to settle on fair price and service quality targets is to understand the market for that particular service. If the market constricts, your leverage goes up. If you don’t understand the market, hire a reputable, experienced consultant –you’ll save money in the long run.
  • 2. Ask for competitive bids. In addition to getting your purchasing department on board, a request for proposal (RFP) is the only way to ascertain the current market price — and play off two competing vendors. While you don’t have to reveal prices, you can suggest that one is high in a given area and may want to sharpen his pencil.
  • 3. Know your target price. In many cases, the best way to compare vendors –and to get the most for your money– is to use a unit-price model in your negotiations, says Jim Pearse, an executive consultant specializing in sourcing issues with Compass America in Oak Brook, Ill. For example, if your internal Help Desk cost is $24.50 per call, and top-performing Help Desks handle a call for $15.50, you should expect the vendor to aim for the best price of $15.50, a 35 percent improvement. “Of course if your initial cost is $24.50, you can’t expect a 35 percent improvement overnight,” Pearse admits. “But the point is you shouldn’t just settle for a 15% improvement as an ultimate goal.”
  • 4. Know your vendor. The biggest bargain in the world means nothing if your vendor goes belly-up. In addition to the no-brainers –such as lawsuits pending– research the firm’s recent hiring and firing plans. You should also find out how they treat the acquisition of employees in an outsourced relationship, since yours may become theirs one day.
  • 5. Put your love on hold. Technophilia –the love of technology– is a dangerous passion, according to the authors of The Smart Way to Buy Information Technology: How to Maximize Value and Avoid Costly Pitfalls. They advise separating the high-priced toys from the technology that will provide real results. Vendors are great at creating desires that can be satisfied with their products. You’ll gain points on the deal if you’re not blinded by love.
  • 6. Find the Achilles heel. Knowing a potential vendor inside out helps you make a love match — but it can also help you make a power play. Consider this strategy from Lackow: “When we write an RFP for a company, we ask the vendor for a list of contracts won and lost over the past two years. That tells us who we’re dealing with –and how hungry they might be for the business.”
  • 7. Use potential services as bargaining chips. A vendor may be willing to lose money on an initial deal if he sees a potential to expand the relationship in the future — and most contracts do grow over time.
  • 8. Know the breakpoint.Don’t low-ball the price to such an extent that you undercut the vendor’s ability to provide the service. “That extra 1 to 2% is not worth the squeeze if it gets in the way of service,” says Lackow.
  • 9. Stick to your specs. Just like in buying a car, fancy options jack up the price. Resist the temptation to include a feature just because the vendor is pushing it. By drawing up your list of specs in advance, you’ll steer clear of the smoke and mirrors.
  • 10. Reward good behavior. Building incentives into your initial contract can pay off in the long term by motivating your partner to invest more time, money, and effort into the relationship. Ultimately it’s a strong cultural fit –and mutual interest– that will make your relationship productive and prosperous.

Eva Marer is a freelance business and technology reporter based in New York. She covers investments, personal finance and corporate technology issues for a variety of trade and consumer magazines. Contact her at [email protected].