Wednesday, October 15, 2014

Tips from an industry insider: Negotiating Strategies Your Vendors Do NOT want you to know about.

How to create a winning contract negotiating strategy and avoid the telecom contract "Hotel California".
Your company is massive; you spend millions of dollars on telecom. You have a team of Harvard MBAs and Lawyers running your procurement operations. You have run extensive RFP's. You've consulted Gartner. You've had 9 rounds of negotiations. Finally, when you vendor says "this is the best we can do or we will have to walk", you sign that 3 year, multi-million dollar commitment and feel good about it.
Your carrier installs your data network and provides a myriad of management services to make sure everything runs right. They run your firewalls and manage your routers. They provide complex and feature rich 800 services to your call center. They find all sorts of ways to sell you more services and make your life easier. They have now become an integral part of your business. When they have sold you all they can, you now just transitioned from being a "prospect to a customer". You have now fully checked into the telecom, Hotel California and things seem great. 
Renewal Time
"You can check out any time, but you can never leave"hotel_california_cover252x185.jpg
If you are a smaller company with less complex services, it is pretty easy to change vendors. Your vendor knows this. This business is very vulnerable to loss, forcing the carrier to be ultra-competitive every year.
If you are a large multi-location or global customer, changing vendors is neither easy nor cheap. Your vendor also knows this.
This is where the door to the exit starts to disappear.
In the telecom market, pricing has always been a constant state of decline. When you're a prospect, you will likely get great market pricing. You're now locked in for 3 years at that price. As the years go on though, the rest of the market is dropping at a rate of approximately 20%/year. By the 3rd year, you are likely to be paying as much as 40% more than what your smaller competitors are paying. Now, all that money you spend on all those integrated services, have now just become a huge disadvantage at the negotiating table. The bigger you are the worse it is.
Example of rate decline relative to your spend.
 Year 1 Year 2Year 3Year 4Year 5Year 6
Price of Service You Committed 3 Yr Deal$100$100$100$100$100$100
Incumbent 3 Year Renewal Offer$80$80$80
Current Market Price with 20% Annual Market Drop$100$80$64$51.20$40.96$32.77
Amount Of Over Spend Relative to Market$0$20$36$28$39.04$47.23
Percentage of Overspend To Market Ratio0%20%36%36%49%59%






This table represents how long term contracts will reduce your competitiveness over time. In year 4, this assumes your incumbent gives you an additional 20% discount to keep you happy and renew for another 3 years.  With out the right strategy and leverage, you will never get to the best market rates and thus will not be as competitive. 
There are only two reasons why a carrier will reduce a customer's rates or provide better terms.
  1. The promise of new business. (Now your back to being a prospect again; well sort of).  Every new business deal should stand on its own merit.  Avoid letting the carrier make new revenue as condition of a better deal.  
  2. The fear of losing business.  It costs 20X as much to gain a new customer as it is to keep an existing one.
    1. From your account teams perspective, fear of losing a marquee customer and upward mobility. What sales team wants to be recognized by the "C Suite" as the ones who blew a $100M deal?
    2. Fear of compensation loss. Due to your size, you are probably the only or one of a few large customers your sales team is responsible for. The loss of your account has a much bigger impact on your sales team compensation than one with dozens of smaller clients.  Remember, your not negotiating with your sales team, your negotiating with their finance team. "Get your account team to work for you instead of against you".  If you position it correctly, your sales team will start negotiating with their finance team on your behalf.
Instead of letting your vendor plays off your fear of moving, flip the table. Remember, your carrier has much more to lose than you do.
How do carriers calculate what they are going to offer you on your next 3 year renewal?
Carriers' factor in the cost of moving, the customer's corporate politics (Do the Carrier and your company's CEO share a board seat? etc...) and most importantly, the fear factor. Contract improvements, are based almost solely on your carrier's perception of your appetite and ability to change. This determines how vulnerable your business is to them. This means everything at the negotiating table.
How to flip the tables and give your company the upper hand?
    1. Be Prepared to Walk.
      Your entire procurement and exec team all need to be feel comfortable that you can switch vendors without summoning the 4 horsemen. Any wavering or mixed messages and your vendor will know it. Large companies switch vendors all the time.  It may seem imposing, but with the right resources and plan, you can change vendors without bringing your business to a halt. The vast majority of telecom services today have been largely commoditized.  If you don't truly believe that, then that exit door just disappeared. Take all the emotion out of it. You have got to be prepared to walk away from the table.
    2. Start Early
      Make sure you start negotiating early enough. The bigger you are, the early you should start. Start the process at least a year before the end of your contract. If you start negotiating when there is only 6 months left on the contract, your carrier just got the upper hand in a big way. Moving a major network can take 6 month. Your carrier knows this.  By the time you have 6 months left on your contract, you should have already be ready to jump to another ship.
    3. Avoid the delay game.
    4. One of the incumbent carrier's favorite tactics is to try and run out the clock.
      If you have less than 6 months left in your term,  your incumbent carrier will do everything it can to delay. They do it with a skill only equaled by Ahmadinejad delaying his nuclear program.  They will stall, take several weeks to meet with all the Sr. Executives and remind them what a strategic partner they have been and all the special things they do. Then they can take 3-4 weeks to get you your new proposal. When you see how bad it is, they will take another 3-4 weeks "working the numbers" and more meetings etc...  Then they will bring in an executive negotiator which will need another 30 days to get special pricing. Standard lines include:
    1. "To get this special pricing, we just need another few weeks". "your are really going to like what we are putting together".
    2. "We have some preliminary numbers you are going to love, but they still haven't been approved by finance".
    3. "We are going to need to get our executives involved get your special pricing approved".
    4. We can't tell you yet what the pricing is until we get executive level sign off".
    5. "Our finance team needs to see more information on the competitive bids.

      If you have negotiated contracts with one of the big two carriers, I am sure you have heard every one of these excuses. It is part of their standard playbook. Now, you are down to 3-4 months left on your agreement and it is probably too late to get new agreements from another carrier and implement your new network before the end of the term is up. At this time you get their best and final.  When you realize that other companies are getting better pricing and terms, it is too late to do anything about it. When you reach the end of your term you have to either, terminate or sign up for another term. Your carrier knows this.  If your not prepared ahead of time, you just lost your biggest bargaining chip and its another stay at the Hotel, whether you like it or not.
  1. Have credible competitive data
    Every carrier sales team out there knows that without a credible threat, their management will never sign off on special pricing. The carrier will need to see something that proves you got a better deal or they will not likely go for it. Think about it, if one of your sales reps came to you and said "we need to reduce this customer margins by 40%".  With nothing more than the word of the customer, would you give it to them?   If you can find a company with a real time market pricing database or a library of contracts from that same vendor showing better terms to another customer, even better. Your sales team does not want to lose commissions. Make it easy for them to sell to their management why you should get special pricing.
  2. Send them an official notice of termination
    Do not be afraid to send them an letter of intent 6-8 months before the end of term indicating that you will not be renewing their contract and will start moving business once your revenue commitments have been satisfied or the end of the term, whichever is sooner. Once you have put this in writing, I can assure that nothing gets your carrier's attention faster. You can always cancel your letter of intent before the end of term if need be. Remember though, you want to be in a position to really leave them if they do not provide a fair price.
If done right, you will have every leverage point on your incumbent carrier and you can call the shots.
How to stay out of Hotel California in the first place?
There are several things you can do to avoid getting another 3 year stay at the hotel, with rates higher than your competitors. In order to get your carrier to agree to these things, you must have the leverage to demand them.
  1. Your commitment level. 
    Demand a term commitment vs. an annual one. If you know your spend is $10M/year or $30M over 3 years, sign up for a commitment of only 60% of your total spend or $18M. At your spend rate, you will have satisfied your revenue commitment in less than 2 years. This means you can check out anytime you want AND can actually leave. Your carrier however will still obligated to provide you the services at the current prices until the end of the agreement. This is crucial. You carrier will fight you on this tooth and nail on this point. They will say that they cannot give you the discounts you want with such a small commitment. There are many carriers out there who do not rely on these big commitments. If you can show your incumbent carrier that your competitive bids require substantially smaller commitments, the leverage swings back to you.
  2. Extension periods.
    Do not sign up for more than 1 year extension periods.  A 2+1+1+1 term gives greater flexibility. Do not sign up for a 3 year term with a 3 year renewal.
  3. Auto renew
    Pay close attention to these.  Know when your cut off is to terminate the contract or have it auto-renew.  A better end of contract strategy is to get the contract to convert to a month to month agreement, but with all the discounts and terms provided by the previous term.
  4. Attainment Contracts.Another strategy is to negotiate a pricing structure based on how much you actually spend vs. what you commit to. By signing a small commitment and leave the rest to actual spend, this gives you flexibility to leave with less downside.
  5. Annual Rate Review
    Next time you negotiate a contract, get an annual rate review.   (
    Sample language from some of the contracts we negotiate).
Review of Rates and Charges
"At Customer's option and upon its written request, the parties shall meet at least ninety days before the first and each subsequent anniversary (except the last, and not counting any un-exercised renewal periods) of the Effective Date. Acting in good faith, the parties will seek to determine whether (and, ifs, what) changes to the Rates and Charges and/or Customer commitments are appropriate in the light of then-current service alternatives and pricing available from (Carrier ) and its principal competitors in the marketplace for communications services. (Make sure you define as broadly as possible to avoid someone like ATT saying Verizon is their only competitor). Taking into consideration the total volume of (Carrier) revenue generated by Customer globally across all current and new (Carrier), the intent of the parties is that the Rates and Charges in the Attachments for the Services, taken as a whole, remain competitive with the rates and charges available in the marketplace for Services comparable to the Services that will be provided to Customer. (Again, be sure to define broadly) Subject to be obligations to other customers (Carrier) agrees to provide customer pricing and other information relevant to this determination. (Be sure to define what constitutes these obligations. You do not want the Carrier to say that they cannot share any other internal pricing data, because each customer is under NDA)."
Unfortunately, we see so many of our large client's contracts convert to month to month pricing when the time runs out or renew for  another 3 year term.  This means all those 90% discounts stop. For each $1M/month in spend, your rates will go up by approximately $9M each month. Now the leverage shifts squarely in seat of the vendor. If you haven't followed the tips above, the vendor will know that there is not enough time for you to move vendors and thus there is no risk of you leaving.  The carrier will call your bluff and its back to being a guest at the hotel for at another 3 years.  You end up being essentially coerced into signing whatever they offer you, "or else". This cycle continues over and over again. By the end of your second 3rd year term, you company could be paying more than 60% over your smaller competitors. See table.  Based on the Carrier's "Hotel California" contract strategy, they do NOT like giving out exits.  The ONLY way you are going to get these types of clauses in your agreements, is if you have sufficient, leverage and/or can show them where other client's have received the same. 
No matter how big your company or how proficient your procurement team is, your carrier will not freely offer you the best terms unless you know already know what they are. Your carrier will not share with you what other customers are paying.  The only way you will know what these measures and clauses are in the first place, is to have a library and database of your incumbent carrier's other customer's contracts as well those of other carriers.  Your carrier will deny all knowledge of such terms.  When you can show proof to the carrier that they have given these same terms to their other customers, checkmate.  
These are just a few ways to enjoy the Hotel California, checkout AND leave any time you want.
This is a big part of the carrier's negotiating playbook.  For a period of 10 years, I was one of the top producing Account Executives for 3 different telecom carriers and co-founded a publicly traded telecom carrier.  I used these tactics every day to great effect.  Now that I am working on the other side of the table as lead contract negotiator for Global 50 companies, telecom companies, Big 3 consulting firms, and Fortune 100 to 5000 firms, it almost seems unfair.  With a track record of saving clients over $280M, we know these strategies and tactics work. 
 These tactics are not just for telecom, the are just as applicable to software licenses, mobile agreements and many other contracts.  The larger you are, the more difficult it is to change vendors. As soon as the vendor feels your can't realistically go anywhere, your right back at the hotel. 
Anyway, I hope that you find this article useful the next time you are sitting across the negotiating table from your telecom, mobile, IT or software vendors.  If done right, you WILL significantly improve your contracts and lower your operating costs.