Procurement News

The importance of negotiation in procurement

It may sound obvious that negotiation is an important part of any procurement strategy, however there is more to negotiation than people sometimes think.

We have worked with lots of individuals over the years who think that Procurement’s role is to come in at the end of the sourcing process and ‘beat the suppliers down on price’. For some simple, commodity purchases, once you have confirmed that you have the right specification, it is definitely about price and delivery and you can shop around until you get the best deal. However, for more strategic sourcing you need a procurement strategy that incorporates all the elements of the purchase to ensure you are getting the best overall terms.

As is the case for many aspects of the procurement process, data and detailed analysis are key to delivering a successful outcome. If you only look at the final price, you are missing the importance of considering the whole offer on the table as well as the prevailing ‘sales’ conditions. There are many levers that affect the overall cost suppliers offer – some of which are not immediately obvious unless you know where to look. Their job as sales professionals it to secure the best deal possible for their business. Our job as procurement professionals is to ensure our business (or in our case clients) only pay for what they need and get the right solution at the best possible value.

So, what are some of the key elements to consider for IT Procurement?

1. Implementation deliverables and team

Even if you are offered a ‘fixed price’ set up fee, it is important to investigate how this cost is calculated. It could be a single fee that is charged to all clients, however, as a minimum this should be benchmarked against other providers.

For larger projects, particularly in the IT delivery space, you will want to understand the make up of the resource types, where they are based (on-shore, near-shore, off-shore), how long they are expected to work on the implementation and you should ensure the internal team in your organisation agree with these assumptions.

There are often hidden costs in the implementation fees too around risk premiums, expenses, travel, management overhead and even admin and printing costs sometimes, that you need to understand before you agree to the total charge.

2. SPEcification of the goods or services

This is one area that is usually well scrutinised as it is something companies specify up front, however, it is still worth ensuring that the suppliers have only costed in the elements of their solution or product set that you have requested. Where possible, you should ensure you only start paying for functionality or items when you start using them – paying for licenses up front is often requested but sometimes negotiable.

Furthermore, you should leverage your negotiation position before contract sign off to confirm costs for future volume uplifts or additional purchases as well as ensuring you are clear about any annual standard increases that apply to the pricing (these clauses are often hidden in the ‘small print’).

3. support model

Many organisations offer a variety of support options that vary the speed of response, the hours of operation, whether you pay extra for services or they are included etc. Clearly this forms an important part of the specification but also the negotiation. A higher level of support is valuable to the client but is an overhead for the supplier so can sometimes be offered as an incentive as part of the overall commercial deal. But you need to know to ask!

4. relationship management

For strategic suppliers, ongoing relationship management is a ‘given’ and should form part of any commercial offer. Regular review meetings with a named account manager and access to more senior individuals in both organisations are cornerstones of any good Supplier Relationship Management framework however, some organisations ‘hide’ the cost of this in a generic overhead or charge a % for ‘management’ that is never challenged.

5. OTHER CONTRACTUAL TERMS

Sometimes the terms and conditions are seen as the ‘legal bit’ that are there to be signed once the ‘deal is done’, however, we have often seen people come unstuck here. It is true that the schedules usually detail the implementation services, the ongoing services, the licence requirements and the support conditions, amongst other things, and very much reflect the specifics of the services being provided, however, there are elements of the legal terms that can impact the cost too. Such as the liability levels, any specific liability caps that are required, insurance levels, indemnities, warranties etc. Negotiating positions on all these things while you still have leverage is always the best approach.

6. External factors

As well as unpacking the commercial deal, it is important to consider the market factors that could impact your leverage. For example, you should consider how important the contract will be to the supplier not just in terms of income, but also if you are a good cultural fit with their organisation. In these situations they are likely to work harder to win your business and it can also unlock incentives and benefits such as further discounts for offering to be a case study or reference for them.

7. timing

For some of the larger software houses, their end of year can affect the level of discount they will offer. Of course there are deals to be done during the year too, however, there are benefits in aligning your contract term to their financial year.

These are just some of the things worth considering when putting together a negotiation strategy in the IT space, please get in touch to discuss how we could help you negotiate the best deal.

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