Insights / Finance / Article

3 Steps to Improve Procurement Negotiations

August 10, 2016

Contributor: Rob van der Meulen

Technology procurement leaders can use these tips to optimize spending and satisfaction with vendor agreements.

Successful procurement negotiations are built on a delicate balance of protecting stakeholder information while gathering as much intelligence as possible on vendor priorities and positions.

Marie Sienkowski, research director at Gartner, has identified three top-line ways to improve procurement outcomes.

Know your stakeholders’ objectives and have a plan B

Procurement leaders who enter into negotiations without properly understanding the requirements of their business, in terms of technical scope or number of licenses needed, leave themselves vulnerable to upselling. Initially attractive due to greater discounts, upselling’s benefits can be quickly eaten away by the cost of support and maintenance.

“ Procurement leaders who do not have a plan B will drastically limit their leverage in negotiations with vendors.”

To help understand the requirements fully, it’s vital to distinguish between needs and wants. Simply asking a stakeholder “If a vendor can’t do this, should we eliminate them from consideration?” will be enough to clarify what’s essential, and what’s desirable. More detail is recommended, however. Questioning stakeholders at length before any negotiations will identify alternatives, if the main choice is not possible.

Procurement leaders who do not have a plan B, based on prioritized issues drawn from stakeholder information, will drastically limit their leverage in negotiations with vendors. The option to walk away is always a stronger position to negotiate from.

Know your vendor’s wants and needs

Procurement leaders who thoroughly research the commercial drivers of their target vendors are best placed to exploit this information to get the best deal for their organization. First of all, determine which products or services are most strategic to the vendor.

While most procurement leaders know that vendors use aggressive discounting to push adoption of new or strategic products, they might be surprised about the pressure put on the vendor sales team. Some software vendors offer bonuses of seven times basic salary on certain products, compared to the typical value of 2.5 times. Knowing that such incentives are in place means a buyer should be able to drive a hard bargain.

It pays to ask your sales team or account executive these things. They will often share information about the challenges they are facing or the incentives they are working towards. You can also gather even more information about your vendor’s priorities by networking with similar customers.

Possessing this information enables a very simple but effective negotiation tool: comparing a stakeholder’s needs with vendor priorities to identify aspects of a potential deal that are low effort or cost for your organisation, but valuable to the vendor. Participating in vendor conferences, or an offer of case studies or testimonials, product feedback or collaborative development could all help secure a better deal.

Control the flow of information

Many stakeholders and people in business or technology roles are neither experienced nor natural negotiators. They do not understand why certain information can be damaging to their negotiation and will share budget, deadlines, selection criteria and their decision-making processes with vendors. Often they believe this transparency helps to expedite the process or enables the supplier to present a useful proposal, without understanding the downsides.

“ It’s vital that procurement leaders keep tight control over communications while vendors are competing for business”

It’s vital, therefore, that procurement leaders keep tight control over communications while vendors are competing for business. This could involve a communications blackout with clearly defined consequences for non-compliance, directing all vendors to communicate only with the specified negotiator or negotiation team while discussions are ongoing. This is often best spelled out in writing and confirmed in a conversation to impress the importance on the vendors.

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