Wednesday, May 20, 2009

"L" Is For "Leverage"

Make him an offer he can’t refuse,” is a brilliant example of leverage in negotiations, although it has two small flaws:

  • Violence is generally bad for business; and, on the other hand,

  • Most businesses are not willing to pay any price for a deal.

Rather, Vendor wants to make the most money possible, and Customer wants to spend the least. The final deal will reflect the skill, tenacity and leverage possessed by each party. In addition, successful performance of a contract may be directly influenced by the leverage retained by Customer.

During negotiations, leverage is directly proportionate to Customer’s options. The more options – the easier it is to say “No” to any one Vendor – the more leverage Customer has. I can recall when, many years ago, “negotiating” with IBM for data services meant haggling over volume discounts and service hours. There were competitors in the market, but none of them rivaled IBM’s reputation for service and cutting edge technology. With little competition, IBM had no incentive to change its standard terms and conditions.

Today there is vigorous competition in most sections of the IT market. Few companies dominate their fields, giving Customers room to negotiate. But it is all too easy for Customer to surrender that advantage to Vendor. Once Customer has said “You’ve got the deal,” Vendor has no incentive to make concessions. Better to award the contract only after the competing vendors have made their best offer on price and terms and standards and service levels and warranties, etc. Also, consider requiring vendors to comment on your standard contract terms as part of RFP. Vendors who request unreasonable changes, or an unreasonable number of changes, may be weeded out early in the process. Time spent on needless negotiation will only delay project completion and a difficult negotiation may portend a difficult relationship.

For a Customer, at least, leverage should not end when the contract is signed. If the agreement calls for Customer to pay in full up front, or at specified interval (e.g. at 30, 60 and 90 days), Customer will lose a major lever – withholding payment if work is late or not up to the agreed standards. This approach requires care if it is to be successful. Timetables and standards must be reasonable and mutually agreed. Standards must be subject to objective measurement. That was Customer will be protected against a delay of “a few days,” that turns into a few weeks, while Vendor is protected against a Customer’s decision that they don’t like (or can’t afford) the product.

Legend has it Archimedes said “Give me a lever and I will move the world.” The business lawyer might well say “Give me more leverage and I’ll get you a better deal.”

1 comment:

  1. This is a great post. I've been yammering at the banks I represent for years about the same things, with mixed results. Thanks for the reinforcement. Love this blog, by the way.