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The art of the deal: Tips on negotiating with IT vendors

CIO Robert Tidwell badly wanted to create a campus-wide wireless network for his organization, New Mexico's San Juan College, but the price tag was more than he could afford. So instead of calling Cisco et al. and trying to wangle a bargain price that would fit his budget, Tidwell took a different tack.

He approached his PC vendor, Gateway, and offered to become a reference site for the company's wireless efforts if Gateway coughed up a significant portion of the money to install the network. It worked.

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"I'm paying about one-third of the cost of taking the main campus completely wireless," he said. "Gateway is paying the rest, and I'll use them to buy wireless laptops for the entire faculty next July." In return, Tidwell will host groups of prospective Gateway buyers at his Farmington, N.M., campus, giving them tours of his wireless project and providing housing during their visits.

"Gateway is eating a lot of this project because they know that, by doing this, we'll continue to buy computers from them for years to come," he said. Not only that, but the project lets Gateway further its strategic wireless plans. For the PC vendor, the loss of installing a wireless network is worth the price of admission.

These days, Tidwell's "you scratch my back; I'll scratch yours" approach is unusual. With IT spending in the doldrums, vendors are frantic to make deals, and CIOs are taking advantage of this by playing hardball on price.

"CIOs are absolutely in the driver's seat these days," said Nancy Gendron, the vice president of contract negotiation and benchmark services at AMR Research Inc. in Boston.

But many experts say that, by concentrating solely on price, IT executives can actually end up driving a bad bargain. IT purchases aren't like buying office furniture, where a chair will be a chair no matter what the final price is. Software purchases include issues of maintenance, licensing and integration, to name a few, all of which can severely impact the success of a project, now matter how good a price the CIO pays upfront. "You can buy furniture for a room that doesn't match the existing decor and it will still work," Tidwell said. "Software doesn't work that way."

While negotiating a good price is undoubtedly important, there are other methods that IT executives should use to make sure they get a technology deal that's not only well-priced, but which stands the best chance of getting the project implemented successfully. After all, the ROI truly arrives when a company is able to use technology to its business advantage, not when the vendors give an 80% discount.

The following are some issues to consider when thinking about purchasing IT products and services:

Think partner, not adversary

Tidwell clearly knows how to think partner, but he suspects that most IT executives think skinflint. It's possible to do both. "The most common mistake is to create an adversarial situation in which you approach a vendor on a big deal and say, 'I want you to cut prices below the profit margin, and I don't care about your pain,' " he said. The vendor has no incentive to stay in the relationship and, perhaps, share the risk.

And risk sharing is key, said Gendron. "There are times when it makes sense for the customer to pay a little more than they could in this market to get the right risk-sharing agreement and implementation deal," she said.

"Most companies don't do risk analysis, and that's too bad," said Tom Pisello, the CEO of Orlando, Fla.-based Alinean LLC, a manufacturer of software that calculates the ROI of software purchases. "Companies would be better served by giving up a couple of dollars and getting vendors to take on some shared risk." For example, Pisello cites Collegis Inc., a Maitland, Fla.-based outsourcing company that will defer payment on contracts until certain performance goals are met.

The best way to get vendors to take on risk is to offer them the chance of a reward. With Collegis, for example, "If they achieve better than the agreed-upon performance metrics, they also get some upside," he said.

Plan for future business contingencies

"There are lots of folks running around that negotiated a seven-year, 80% discount on the price, but at the end of the day, that could turn out to be more of a 60% discount if they didn't think through future costs and protect themselves," Gendron said. For example, given the spate of layoffs over the past couple years, "How many companies have maintenance bills and contracts that are killing them because they're paying for users who aren't there any more?" she asked.

"Very few businesses plan to stay the same over five years, and these are the things that easily get left behind," Gendron said.

Tidwell generally asks for quotes for the second and third year of software maintenance because costs frequently skyrocket after the first year.

The business side needs a place at the table

Not only are the business sponsors vital to making sure that CIOs buy the right software for the job, but they can save money. "A lot of times IT people don't really know what the end users want or don't want," Tidwell said. "Without them, you could end up paying for things that they won't use." For example, he said that when he recently bought a library information system, he consulted the library staff, and they ended up cutting out several modules that the IS staff had just assumed were necessary. "They didn't need them, as it turns out, and the price came in lower because of that," he said.

Moreover, Pisello said that a successful implementation rests on user acceptance; business-unit involvement in the project from the earliest moments is key to gaining that acceptance.

Stay the course

"When you're dealing with major application purchases, speed kills," Gendron said. CIOs need to take the time for some thoughtful analysis, not only of the software and its pricing schemes, but also of how the project fits into the company as a whole, who might be using the technology, how it will be implemented. "There are so many factors," she said. "It's possible to do a good job and do it quickly, but you have to do it thoroughly, and that's where the problems come in."

Often, she said, CIOs and the senior business executives will kick off negotiations but then leave the legal and procurement staff to wrap up the details. "But those are the very things that are wrapped around business practices that can come back and bite you later," she warned.

The opportunities for technology buyers today are indeed enticing. Vendors are hungry to make deals, and CIOs would be foolish to ignore this buyer's market. But taking it too far could be equally foolish; after all, what goes around generally comes around, and business cycles don't last forever.


This was first published in January 2003

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