Here's a savvy business practice that's not just something talked about in MBA programs: it's cheaper to keep an existing customer than it is to go out and get a new one. If you're negotiating with a supplier and stuck between a rock and a hard place, think about using this to your advantage, like one company did recently.
A customer was negotiating the extension of an outsourcing agreement. The relationship had been working well. The supplier was meeting expectations, and the customer was becoming comfortable -- and dependent. Its former IT people were working for the outsourcer; the outsourcer owned all the technology assets and had become the licensee of most of the critical software.
Negotiations progressed smoothly, at first, with most terms and conditions reaffirmed for a new five-year contract, since it would be essentially the same deal. All appeared to be going very well -- until pricing was addressed. It then became obvious that the supplier intended to leverage the customer's dependence into greater profit.
Specifically, the supplier wanted $US3.5 million more in the new contract -- a whopping 29 per cent increase. Whoa! What happened? The supplier had decided to exploit this wonderful "partnership" for a windfall profit.
Negotiations heated up and revolved around the stunned customer's attempt to understand the supplier's requested price increase. The customer and supplier talked at great length about the cost of each service component, including hardware, software, communications, operations and support personnel, and data centre infrastructure. Each component's cost was dissected and examined. Alternatives were proposed and reviewed.
The customer assertively pushed the supplier on the price of each component. The process yielded a new overall price increase proposal: only $1.4 million, a drop of $2.1 million! So when you break apart all-inclusive pricing, remember to question, analyse and negotiate each individual part, since the sum of the "optimised" parts may not add up to the original "packaged" price.
Should the customer have been happy at this point? Definitely not. It still faced a significant increase of 11.7 per cent for the same service. Nothing had changed to warrant a price increase. Newer hardware and lower operating costs were offsetting higher labour costs. And, since this would be an extension of an existing contract, the supplier didn't have startup costs or a learning curve to deal with.
It appeared that the supplier just wanted to maximise its margins at its "partner's" expense, for what was essentially the same job.
Having dissected the pricing, the customer took a new approach. It reminded the supplier of their long, valued relationship and that it may be cheaper for it to keep an existing customer than to find a new one. Implied in this tactic was a threat to change suppliers. Given that the $1.4 million cost increase was still on the table, changing suppliers could probably be cost-justified, but it would be a pain in the neck. At that point, the customer's representatives did the smart thing: they just shut up.
At times like this, silence is devastating to suppliers. They ask themselves: "Are they serious? Are they talking to someone else? Are we going to have to face heavy competition to keep this account?"
In this case, the supplier blinked first. Within a week, it responded with a new proposal -- one that didn't include a price increase.
After careful consideration, the supplier apparently came to the conclusion that it would be cheaper to keep a valued customer than to go out and get a new one.
The lesson is that many times, successful long-term supplier relationships foster such cozy co-dependencies that it's easy to forget that the people involved work for different companies -- a customer company and a supplier company, each with different sets of stockholders and both wanting maximum profits. Consequently, during negotiations or renegotiations, try to take care of whom you really work for: your company and its stockholders.
Here's some advice we all need to remember when we're negotiating multimillion-dollar IT deals: on the negotiations strategy keyboard, always keep one finger on the Escape key.