Do you find yourself getting into "fire-fighting" mode when deals need to be finalized? Forrester has found it's not uncommon for sourcing professionals to have contracts thrust upon them by impatient business or IT users that "must get signed in the next two days" or similar situations.
Forrester regularly assists its clients on matters relating to contracts, pricing and negotiations. While software, hardware, telecom and services deals have their own unique characteristics, We have developed the following five-step approach that can be used regardless of IT category. The approach will help you avoid mistakes brought on by hectic schedules and conflicting user demands:
Phase I: Market Overview. In this phase, sourcing executives and their teams will analyze the external market - both at the product/service level and at the broader category level. For example, a client making a major SAP purchase would look for information on SAP as a company, but also its immediate competitors, the enterprise resource planning (ERP) category in general, and any emerging technologies that could affect the ERP market, like Software-as-a-Service options. Factors to keep in mind during this phase are market players, market dynamics, trends and end-user comparisons. A core step in any market overview is understanding what other firms are currently doing and getting in their negotiations.
Phase II: Internal Preparation. After completing the market overview, sourcing executives work with the relevant internal stakeholders to put together a high-level approach to their negotiation, including proving the decision to do the deal at all by re-examining the business case developed earlier in the sourcing process. Why is this Phase 2 and not Phase 1? Because sourcing executives need to understand what's possible and reasonable before crafting an internal response. If internal preparation and strategy happen before understanding the market, the sourcing executive and internal constituents could find they've wasted a lot of time building an approach that can't be executed, and then would have to redo the internal preparation and negotiation strategy phases.
Key steps in this phase include: assembling the negotiation team and assigning responsibilities, setting negotiation goals, taking a first pass at strategy objectives, justifying the decision, and creating decision support framework.
Phase III: Negotiation Strategy. With internal preparation complete, it's time to work with key stakeholders to construct a negotiation strategy. This phase involves considering how to proceed with the negotiation - for example, your strategy will be different if the deal must happen regardless versus if there is the potential to walk away from the negotiation if it gets bogged down or it becomes apparent that the vendor has incompatible goals that will very likely cause the deal to fail. You should understand alternatives or consequence of no agreement or change of scope. A key part of a negotiation strategy is to understand the alternatives to signing a particular deal. Additionally, during this phase you should validate and prioritize scope and commercial needs and requirements, validate RFP or RFQ responses against requirements, assess pricing models, and finalize negotiation strategy.
Phase IV: Negotiation Execution. Once a strategy has been set, negotiations begin in earnest. This phase typically involves a myriad of details, so it's important for sourcing executives to make sure the prior phases have been completed successfully. Why? If some key information is missing because of a failure in an earlier step it can slow down the negotiation or worse, force the buyer to sign a less-than-optimal deal. This step also brings in key internal stakeholders much more deeply - for example, legal, finance, and subject matter experts will all need to make sure the contract meets their requirements.
In this phase, you should compare common practices, terms, SLAs, concessions, etc. Once the vendor has moved from early proposals to formal negotiations, the sourcing executive needs to compare the specific terms and conditions in the contract with the market - both for commonly acceptable ones, as well as for best and worst practices. You should also validate pricing, review terms and conditions, conduct general review and revalidate against objectives. Be sure to include vendor management/relationship clauses: too often clients view sourcing as a project where the end result is a signed contract; however, that's simply the beginning of the long-term relationship with a supplier. This phase concludes with implementing specific negotiation actions.
Phase V: Decision. After all of the effort involved in completing the negotiation, it would seem that signing the contract wouldn't warrant its own phase. But depending on the vendor's behavior in the negotiation, whether the need for the technology or service has dwindled, or a number of other factors, even negotiations that have reached this phase do not necessarily result in signed contracts. More importantly, ensuring satisfaction with the deal long-term involves doing a final validation of the proposal to scope, final justification of the need, and then, yes, a decision to sign the contract (or not).
What do these last steps involve?
- Final validation. Smart sourcing executives will take a step back, review the original goals, and validate that the final proposal and contract match those goals.
- Final justification. Review the ROI and other justifications for the original negotiation. Ensure that any modifications made throughout the negotiation have not changed the justification to sign the deal.
- Final decision. The final step in the negotiation is for the sourcing team to make a recommendation to key internal stakeholders to either sign the contract or walk away from the deal. If the sourcing team captured the appropriate information and is working effectively with internal constituents, then this step should be the culmination of a successful sourcing effort.
Christine Ferrusi Ross is a vice president and research director at Forrester Research, where she serves Sourcing & Vendor Management professionals.
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