I met last week with an industry friend that I had not seen for a while. Our conversation turned to a problematic implementation of a major middle office application, one that is currently running over time, over budget and failing to meet the users' expectations. I was reminded of my last conversation with this firm, where we had discussed how hard to push back against the vendor on cost. In this case, the firm decided to drive the vendor very hard and achieve, what they termed "the best possible price". When I asked the person involved what he meant by the best price, he told me that he had negotiated hard to get the vendor to the lowest point he believed they would get to, and that he thought that they would not be making much, if any, money from this deal. My response was that in my view he had not achieved the best price, as this deal would bring significant problems downstream and that in my view the best deal results in clear and defined value for all parties.
Sadly, this approach is all too common in our industry. The question is, why? Experience has shown that any deal where the vendor is not making a profit will in almost every case lead to delayed implementation timeframes, increased cost for all parties and often a failed or compromised final project. It is clear that if the price is too low, the provider will struggle to provide their highest quality people or additional resources to address project stress. Once a project turns into a loss-making exercise, this problem concerning resources will be exacerbated and the downward spiral will usually accelerate.
It is clear to me that the reason for this familiar situation is complex and involves many factors. Vendors often over-sell, and many will give clients the most optimistic (or unrealistic) timeframes and requirements in order to implement their solution. Once this expectation has been set, the vendor can find itself 'painted into a corner' in terms of realistically planning and pricing the actual implementation. Secondly, buyers often use procurement and legal professionals in order to achieve the lowest price, with incentives to encourage 'success'. Thirdly (and perhaps most importantly), the involved parties do not collaborate to create a shared risks (and rewards) model for the project. If one party is bearing all the 'pain', then they will soon lose motivation and move their best resources onto more profitable or strategic projects.
There are some simple steps to mitigate this real and common risk. Perhaps most importantly, select your vendor carefully and ensure a strong cultural fit. From the outset, work to develop an open, honest relationship and strive for a true 'partnership' (something that is often quoted, but rarely delivered). Resist the corporate pressure and temptation to bring in a negotiating Rottweiler to extract the lowest price.
The contract negotiations can set the tone for the ongoing relationship. It is an opportunity to clearly indicate how you view the supplier and ongoing relationship – as a true business partners or on a buyer/supplier basis. If both sides leave the table feeling good about the agreement then the chances of the partnership being long and mutually fruitful, are hugely enhanced.
From my experience, the 'best price' makes money and success for all parties.
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