Expert Negotiation Tips for the Procurement Process
While procurement is an almost universal topic, many professionals are unsure about whether they are getting the most value they can during the negotiation stage. Even the most seasoned professional can sometimes wonder: Could I have purchased that for less money? Could I have received more services and enhancements? Are others getting a better deal or terms? If you find yourself preparing for negotiations, you may be similarly unsure, struggling with how to preserve a healthy vendor partnership while simultaneously pursuing your business’s best interests.
To help you approach procurement negotiations with confidence, we sat down with Jeanne Ball, an account manager at SHI International Corp., a value-added reseller (VAR) that connects teams with IT solutions and services. With a career that spans both procurement and sales, Ball shared her tips for successfully negotiating your procurement contracts.
1. Start early to minimize pressure
Because technology evaluations are extremely time-consuming, it’s best to start considering whether a vendor is a good fit from the moment you execute the initial agreement. Keep an eye on any vendor contracts within six months of an end date to prepare for a productive renewal conversation. Your vendors will most likely reach out 90 days before the end date, so you want to prepare well in advance of that. By preparing long before that 90-day mark, you avoid losing valuable negotiating power or locking yourself into a renewal contract that’s no longer ideal. As an intermediary between her customers and vendors, Ball reaches out 120 days before a contract expires to ask customers if they plan on renewing and if they’ve considered other vendors. “We want to have all that information when the vendor sales representative comes knocking on our door 90 days in advance,” Ball said.
Entertaining this question early on has an added benefit: minimizing negative emotions. “When people get emotional, negotiations take a turn,” said Ball. “People get emotional when they’re feeling pressure, and pressure can come from a time crunch.” By preparing early, you can reduce the stress and tension often involved in the negotiation process.
2. Seek expert advice
Strategic sourcing teams can provide you with valuable guidance throughout the procurement process. If your organization has a sourcing team, reach out to them early on for advice on standard terms and insight into other areas of the vendor vetting process, as well as market research. Your sourcing team may have their own research or they can purchase market research from third parties. Analyst firms like Gartner and Forrester offer objective analyst research reports and other resources to help guide your decision-making process.
If your organization doesn’t have a sourcing team, you may want to consider working with a trusted VAR. These companies add value to third-party products and services by vetting, procuring, deploying and integrating solutions. Crucially, they can also handle the heavy lifting of contract negotiations on behalf of their clients. While some companies charge you to negotiate renewals, a reputable VAR gets paid from the technology vendors themselves due to the high volume of products and services they sell, saving you money.
An external partner can also save you considerable time and hassle when vetting vendors. Rather than evaluate multiple vendors internally, you can lean on a VAR to conduct research, compile success criteria and survey stakeholders for you. They can even run a proof of concept in their own labs and shoulder the costs of running a test environment.
3. Determine your criteria
Before entering negotiations or while reevaluating an existing vendor, take time to clarify your criteria. How are you going to measure success once the technology is deployed? What are the non-negotiable items for stakeholders on your legal, security and sourcing teams? Decide on your must-have, nice-to-have and not-needed specs and features so you can make informed decisions and keep spending in check. Be sure to include your organization’s standard security and compliance requirements, as well.
If you’re grappling with competing wants like speed, price and quality, take a moment to prioritize these factors.
What, if anything, is driving urgency? If there’s a technology problem posing risk for the business, communicate these circumstances to your internal stakeholders and vendor so they can better support you. If there’s no need to move quickly, Ball recommends slowing down negotiations to avoid making errors.
For the best price, avoid purchasing any “not-needed” features and, as mentioned above, start early to maximize negotiating power. But also remember that compromises can result from choosing by price alone. Consider the potential to optimize your workforce with a premium product. “There are a lot of technology purchases that might seem like nice-to-haves, but they're going to decrease the cost of your overall staffing,” said Ball.
Finally, figure out your best alternative to a negotiated agreement (BATNA) before entering official negotiations. By understanding your backup options, you’ll know whether a deal is the right one in the moment. “If you can’t get to the price point in your budget, do you know the lowest price your vendor is willing to close on?” asked Ball. “That’s going to get you more bargaining power.”
4. Expedite timelines with technology
Beyond doing your research early and actively communicating with stakeholders, you can significantly expedite contract negotiations through technology. A contract lifecycle management (CLM) system makes it easy to see where your contracts are in the review process. It also lets you send reminders, leave notes to team members and even automate routing to speed up review.
By staying in the know of your contract status, you inherently speed up the negotiation process. Allowing your team to review the document and add feedback in one place can also minimize tedious redlining, preventing tensions from creeping in and creating further delays.
5. Ask for favorable pricing and payment terms
Procurement contract terms that typically aren’t negotiable include usage-based charges, end-user licensing agreements and limited liability language. But there are many terms that can be negotiated—or added in to provide you with a more favorable contract. A future pricing guarantee, for instance, can help keep costs uniform throughout the span of your agreement. If you agree to pay $100 per license when you sign your contract, ask your vendor to honor that price should you add more licenses in the future. You can also ask to get a unit cost discount once you surpass a certain number of licenses.
Additionally, few teams realize they can ask for annual payment terms, even if they’re signing a multi-year contract. “Your budgeting team will really love that because you won’t see the full capital expense hit at once,” Ball said. This can be a win for vendors, too, allowing them to limit their risk by spreading revenue out over the course of several years. While vendors will almost always give a greater discount for an up-front lump-sum payment, annual payment terms allow you to gain the discounted rate of a multi-year agreement while limiting your risk.
Another term to consider requesting is a 3% year-over-year price cap. “Everybody was raising their prices this year, but with a year-over-year price cap to avoid inflation, that’s not happening,” Ball said. “If the company pushes back and doesn’t want to approve 3%, match the rate of inflation.”
Finally, in certain circumstances, it may make sense to ask for a contingency contract. Say a vendor meets almost all of your criteria, but one must-have feature is still on their roadmap and projected to go live in six months. Ball recommends asking if you can start a beta partnership where you pay less for the first 6 months. Once the feature is live, you can execute a longer agreement.
6. Watch out for standard, blanket MSAs
A standard, blanket mutual services agreement (MSA) comes with a lot of hidden risk. When reviewing one of these contracts, watch out for auto-renewal and termination clauses. Many SaaS companies require a 30-, 60-, or 90-day termination notice prior to the contract renewal date. If you wait until 60 days before a renewal date to start reevaluating your technology and realize you don’t need the software, you could be stuck paying for it anyway because your period for giving notice has passed.
Year-over-year price increases can also be sitting in a blanket MSA. If you route them for approval without noticing that language, you can create risk for your business. This often applies to companies who receive discounted pricing for the first year or a free trial, as pricing often goes to the full fee after that period is over. “Some agreements won’t even say a price or percentage of a price increase,” Ball said. “They’ll just say, ‘We will bill you at a fair market rate.’ That can be whatever they want it to be.”
7. Establish credibility with your vendor
A well-kept secret to better negotiations is a positive vendor relationship. Rather than focus on competing with your vendor, think of negotiations as an opportunity to establish credibility and establish a good partnership from the start. “Make sure they understand they’re working with someone who has done their research and is well informed or has the resources to get the right information,” said Ball.
Starting off on the right foot and maintaining a good relationship over the course of your engagement can confer extra benefits to your company. Vendors are more likely to go out of their way for favored customers, asking for approval on extra discounts, offering additional training resources and creating an overall better customer success experience. “That’s an ROI that might not even be getting measured,” added Ball.
Learn more about transforming the procure-to-pay process with Docusign for procurement teams.