Vendor Pitfalls in Negotiating Large Multi-Year Contracts - or How to Lose a Million Dollar ContractBy Elaine Billingslea Dockens, Published on June 21, 2009
This article is dedicated to the many professional vendor representatives (VRs) that I've worked with over the years. These are the reps who showed up prepared to do business each time they visited. During contract negotiations they honored themselves, the companies they represented and me by "bringing their A game" and being totally prepared to fully negotiate.
Many of the products they represent are sold by multi-year contracts and are negotiated at annual intervals. During negotiations my goal is to control expenses and look for discounts (and still keep a quality product). The goal of the VRs include obtaining or retaining our business and making a reasonable profit. When we both - firm and vendor - come to the table prepared to get the very best deal for our side, then everybody wins. However, if one of the parties arrives at the table ill prepared - we both lose. The vendor will probably lose the business they could have obtained or retained and the firm loses the chance to seriously consider the vendor in comparison to other vendors.
Below are comments on selected VR behaviors that I've witnessed over the years that substantially decreased the success of the VRs to obtain or retain our business. Hopefully these comments will serve as a guide to reaching a satisfactory conclusion to multi-year contract negotiations.
Ideas to Improve Contract Negotiations
Come Prepared: Know your product. Know what you have to offer and then be able to describe what you have to offer to a specific firm in a credible, winning conversational discourse. Many years ago when I worked for Century 21, we were required to practice scripts that we used for " cold calling" potential customers . We didn't like this much, but I must admit that practicing the scripts very soon gave us a confidence and a speech pattern which was amazingly successful. Perhaps there is a program at your company that would allow you as a VR to practice your delivery to law firm librarians before actually going into the field. Perhaps local librarians could be brought in to practice a dialog with VRs, observe the individual delivery of the VRs and offer opinions. I'm not suggesting that you, as a VR, memorize a script, but I am suggesting that you practice enough (preferably through a company sponsored program). This way you will know your "speech" well enough to give meaningful information to the librarian in a relatively short amount of time.
Get to know your contact at the firm. Give yourself time to know the librarian and learn about the firm from the librarian's point of view (in addition to reading the firms' web site). Meet and talk with the librarian, first on a "get to know you basis" and then periodically, say every quarter, stop by to offer some information about your vendor or product that would be of interest or that would be helpful to the librarian. When out of town managers come to town, make a 15 minute appointment with the librarian to introduce the out-of-town manager. These efforts will usually eliminate the possibility of any VR meeting the librarian for the first time at the negotiating table. During negotiations, most companies usually send at least 2 VRs for negotiations. For best results, the librarian and the VRs should already know each other. I remember one situation where an unknown VR showed up for the negotiations, was introduced for the first time, and became the lead negotiator for the vendor. The librarian had been working for a year and a half with another VR and had no idea that there was a second VR assigned to the account. In all this time the second VR never stopped by for an introduction, to offer to answer questions, or to explain new features of their products. The ensuing negotiation meetings were stilted and unproductive, due in part, to the fact that the librarian and VR were not acquainted.
Know exactly what is being negotiated. If the librarian has prepared to negotiate a multi-year contract for a specific product, it is confusing and nonproductive to introduce an additional product for the first time at the negotiations. If during the preparatory contacts all discussion has centered around one product to be negotiated, it is unwise to add a second product without notice, even if the products are bundled in an attractive package. In one specific negotiation, the librarian had prepared to negotiate a multi-year contract for a large database. During all the negotiation meetings, at least half the time was spent discussing an ancillary product at the insistence of the VRs. Near the end of the negotiations they tied the renewal of the database (worth many tens of thousands of dollars per month) to the purchase of the ancillary product (worth only a couple of thousands of dollars per month). One can only speculate as to the reasoning behind this strategy - which turned out to be a losing strategy. The negotiations fell apart and the VRs did not receive a signed contract for either the large database or the ancillary product.
Avoid Customer Politics. Needless to say, under no circumstances should VRs get involved in customer politics. As the outsider, the VR must be respectful and responsive to all managers at the firm that use the product and are in a position to have occasional contact with the VR. As an outsider, the VR is in the losing position if their actions can be interpreted as favoring one manager over another . One way to avoid the political situation is to document all contacts in e-mails and cc the involved parties. For example, if the Production Manager and the Librarian both are interested in your services, be sure to cc both on every contact you have with the firm until they tell you differently. During negotiations, one sure way to avoid getting involved in customer politics is leave blank any places on the contract requesting contact information with the firm. I know of a negotiation where the VR did in fact fill in the name of a manager as the product contact while in negotiations with another manager of the company who fully expected to be the product contact. Specifically, the VR should not fill in any customer information. Let the customer determine who will be their contact with the vendor.
Another way VRs can avoid the political trap is to be willing to negotiate with the firm's designated representative. A tactic sometimes tried by aggressive VRs is to make a deliberate attempt to go around the librarian and call the secretary of an influential partner and try to meet with that partner or ask to work with someone other than the librarian. There is no way a VR can adopt the "go around" tactic and not be found out. In a different scenario, the VRs headquarters told them to only negotiate with the Managing Partner. However, if the firm has designated the librarian as the negotiating manager, it is ill advised to state your preference for the Managing Partner or worst yet, ask for a chance to meet with the Managing Partner after being told the firm's choice. During one negotiation, the VRs lost at least a week of valuable time waiting for the chance to meet with the managing partner, which was ultimately denied. In this case, after the denial the VRs seemed to lose interest in seriously negotiating. In both cases, it was awkward on both sides for the negotiations to begin again after the VRs had made clear their preference to negotiate with someone else. The outcome was to lose that particular multi-year contract. Without exception, the choice of who the VR will negotiate with belongs to the firm, not to the VR. For the VR to try and influence the firms decision in this regard can only lead to a negative result.
Perhaps it comes down to respecting the person across the negotiating table. Obviously the firm has placed their trust and confidence in the librarian. As a VR you may indeed want to negotiate with another manger or with the Managing Partner, but the most effective tactic is to accept and show respect for the librarian who has been chosen by the firm to handle the negotiations. In addition, it would be wise to follow the librarian's advice regarding aspects of the negotiation, for example, not to bundle two disparate products. The librarian as the negotiator, will know what the firm will accept and approve. In the interest of getting the firm's signature on that multi-year contract, VRs should refrain from ignoring the advice of the designated firm negotiator.
Playing hardball. Statements like "we will not do X" accompanied by a non-blinking demeanor and the refusal to consider new ideas can quickly sour negotiations. Sara Nichols in her excellent article 1, describes the Hardball player with the quote "We're the only game in town; if you won't come to terms, it's your loss." She further states that "It's hard to imagine that anyone can be the only game in town in terms of content anymore, so this tactic doesn't usually have a lot of teeth. 1
As a VR, don't be so rigid in your thinking that you can't consider a new idea. For example, be receptive if the librarian suggests a trial period for your product. Trial periods help to sell the products. If you are trying to obtain the firm's business for the first time, entertain a "getting to know you period" and allow the attorneys to use the database say 3, 4, or 6 months, at a substantial discount. Offer concentrated training opportunities. It's also very important, during the trial period, to "live" at the firm. Offer individual attorneys special tips and advice and even offer to visit their offices to help them set up their desk computer (or other device) to access specific content easily. Spending one on one time with new, unfamiliar users of your product is worth its weight in gold. These interactions will pay off handsomely when it comes time for the firm to accept one vendor instead of another.
Another aspect of playing hardball is to be unwilling to go to your headquarters with a proposal that you as a VR do not have the authority to authorize. During negotiations often an idea will be suggested by the librarian that requires a discussion with the managers back at headquarters. This circumstance is not really that unusual and an outstanding VR will have prepared for this event. Planning includes acquainting yourself with the decision makers at your headquarters, with the accountants or the pricing managers. Maybe give them a "heads up" that you are about to go into negotiations with a specific firm and give them any info about the firm that you have learned through your meeting with the librarian that might affect pricing. Also, ask headquarters to factor in any local crisis in the legal market such as layoffs, freezing of salaries and reduced hiring goals. The vendor should be willing to consider reducing pricing for this specific customer. If this law firm is downsizing their expectations re billing clients, perhaps your headquarters can also downsize invoice expectations for this customer.
I have come across instances where the VRs were unwilling to consider going to their people with a new idea or a request for special consideration. Doesn't it seem logical that VRs would at least act or pretend that they were going to try to make a case with their headquarters based upon their knowledge of what one of their customers really wanted? Tom Siebel says, "We go to extraordinary lengths to listen to the customer and do what the customer needs. ... If we have to choose between dealing with a customer satisfaction issue or developing a product, we deal with the customer first. If we have to choose between pursuing a new sales opportunity or dealing with customer satisfaction, we deal with the customer first. At every fork in the road, it's "customer first." And it always pays off." 2 In my opinion, for a VR to refuse to take a request to headquarters is to engage in a losing strategy.
Wasting valuable time: Use your time wisely from the first day you begin to plan your negotiation strategy. One VR recently showed an unusual disregard for time. This VR was told when the Vendor's competitor appeared on the scene 5 months prior. The Librarian expected that the VR would make preliminary inquiries about the firms plans with the competitor and to start to show a strong interest in keeping the firm's business. Each successive month, the VR was told that the competitor was still at the firm , and each month the VR said "thanks for letting me know" with no other action. In the sixth month, the competitor made a formal bid seeking to win the multi-year contract and gave the firm 30 days to respond. Out of loyalty to the existing VR, the librarian called the VR and said we need to begin serious negotiations now - we have a 30 day window to see if we can continue to do business together. Instead of setting the meeting during the next few days, the VR set the meeting 11 days into the future. The librarian pointed out that 1/3 of the month would pass before talks could begin, but the VR insisted that this was the earliest meeting possible. At this point the librarian shared surprise and frustration that when given a "heads up" that competition is knocking at the door, the VR did not spring immediately into combat mode. The VR wasted 5 months of lead time and finally, when it was only 2½ weeks before the 30 day deadline, the VR tried to roll out a negotiation strategy. Unfortunately, the VR's preparation was poor resulting in the loss of the multi-year contract.
Mesmerized by their own product: Many VRs have a tendency to fall in love with their product. Perhaps this is necessary to be able to convincingly sell the product. However, VRs should avoid falling in love with their product to the extent that they overvalue it or place a value on it higher than the customer. Tom Siebel states that "too many companies ... have an arrogant self-image." 2 For example, I can imagine a librarian telling a VR that it's great that you have all the laws of China on-line since the Ming dynasty, but we have a transactional practice in Illinois and it makes no sense for us to pay for the added content regarding China no matter how valuable and expensive it was for you to add it. Failing to learn the value of your product to the customer jeopardizes your relationship with the customer. Instead, learn the law firm's practice areas and you will begin to understand the value of your product to that particular customer. You will then be able to stress the content that would be most useful and valuable to them. Fitting your content to the needs of the firm, increases the value to the firm and thereby increases the willingness of the firm to pay a good dollar for content " they need to have" rather than for content that is available and perhaps would be "nice to have."
VR Misstatements - Protect your credibility. One way for a VR to lose credibility in a negotiation is to make misstatements. For example, in the middle of negotiations, when trying to distinguish your product from the competitors, do not state that the competitor does not have x when you are not 1000% sure that this is true. It is so easy to check the competitor's web site. In a recent negotiation, a VR made a statement that the competitor did not have x in their legal database. Within 15 minutes after the end of that meeting, the librarian in question went to the competitor's website and found that the statement made in the meeting by the VR was wrong. The content the VR claimed the competitor did not have was clearly available in the competitors main database.
Another way to lose credibility is to make statements about market share or market limitations which are not true. Experienced law librarians have learned a great deal about the market sectors of various vendors and it is to the VRs discredit if they assume that the librarian they are dealing with is not aware. An example of this has to do with limitations on discounts that can be given to customers which may be limited by pre-existing contracts with government agencies. It is imprudent to imply that as a VR you can't give a discount on a certain category of products (say on-line database titles) when in fact the limitations may be placed on another category of product (print titles). It may be true, that you can't discount x when dealing with the law school sector, but it may also true that you can give the discount to the law firm sector of the market. It would seem to be clearly worth the effort to avoid misstatements or misleading remarks when they can cost you and the vendor a multi-year contract.
If You Lose The Contract.
One of the things that surprises me most is when a vendor loses the contract, there is little or no follow up from that company to find out why they lost. Frederick F. Reichheld, accurately describes the situation
"... most ...(CEO's) have little insight into the causes of the customer exodus, let alone the cures, because they do not measure customer defections, make little effort to prevent them , and fail to use defections as a guide to improvements. Yet customer defection is one of the most illuminating measures in business." 3
The best action for the Vendor to take at this point is to contact the librarian and set up a meeting to learn specifically what happened. A VR in one of the losing scenarios described above did phone to ask by how much they lost, but there was no effort or energy exerted toward sitting down and trying to find out why they lost that multi-year contract. David Green states that " I came to realize that my job is not simply to win orders. It's also to learn everything possible from losing orders. " 4 If more VRs, and the companies that employ them, adopted this attitude, there would probably be far fewer multi-year contracts lost due to unnecessary mistakes.
It would of course be a total disaster if any VRs exhibited all the negative behaviors previously discussed! To support their VRs, it is the responsibility of the Vendor to first find out what were the causes behind each lost multi-year contract. "Defecting customers have most of that information. They are always the first to know when a company's value proposition is foundering in the face of competition." 3 Once the causes are ascertained, the Vendor should look at the preparation and support given to their VR's and institute programs and procedures that will increase the likelihood of successful negotiations.
Vendors could employ modern management tools, for example, Six Sigma 5 or the 5 Whys 5 to ascertain the root causes of poor contract negotiations by experienced VRs. Or, depending on the culture of the company, more traditional methods may be appropriate such as a relevant training program which might include role play scenarios and focus groups, which ideally would include experienced law firm librarians. Preparing their representatives for the process of successful, face to face contract negotiations is essential if a Vendor is to maintain and hopefully increase market share. By employing the requisite knowledge and support, Vendors will enable their VRs to negotiate multi-year contracts with results that benefit both the vendor and their customers.
1 Sarah L. Nichols. You Want What? How to Have Fun While Negotiating Contracts, in Spectrum, The Crive Sheet, vol. 30, No.2 , February 2008, pg.10
2 Bronwyn Fryer. High-Tech the Old-Fashioned Way: An Interview with Tom Siebel of Siebel Systems. Harvard Business Review, March 2001.
3 Frederick F. Reichheld. Learning from Customer Defections. Harvard Business Review. March 1996.
4 David Green. Learning From Losing a Customer. Harvard Business Review, May 1989.