How CFOs Can Achieve Strategic Vendor Negotiations

Contributed by Marcus Evans, 26 November, 2014

Chief Financial Officers (CFOs) should not wait until renewal time to renegotiate major contracts, according to Brad Birdwell, Managing Partner, and John Grendi, Senior Vice President, Third Law Sourcing. "Agreements with incumbent vendors can be addressed more frequently, improving pricing even in the middle of a multi-year term," says Birdwell.

You say your consultancy identifies and implements pricing reductions on existing products and services with the current vendors. How does this differ from traditional sourcing practices? 

Birdwell: Traditional sourcing can be resource and time intensive, and may impact existing relationships. When multiple vendors are competing, CFOs can achieve aggressive pricing, but such sourcing may not be an option with their existing partners. Their current supplier may be embedded within their team. There may be significant term or volume commitments within their current agreement. Or there may simply be few, if any, competitive alternatives in the marketplace. A meta-negotiation, where all parties agree that they are avoiding this path, can setup a principled negotiation that is non-disruptive to operations and significantly accelerates savings relative to traditional sourcing. The focus is on transparency into the best pricing model that could be negotiated as a new client today, and their current value to the supplier, based on current volumes and the current pricing environment. 

How would a CFO know if they are not getting a good deal today? 

Birdwell: As a former CFO, I used to frequently ask that question of my team: "Did we get a good deal?" I knew they all viewed themselves as stewards of the company's checkbook, so it was not surprising that the response was always "Yes". But the answer to my follow-up question of "How do we know?" was rarely as certain. There was often a lack of objective criteria with which to gauge the pricing and terms. And, over time, I became aware of certain red flags, things like bundled pricing, where multiple services were rolled into a single price, or volume commitments which might turn a good deal today into a not-so-good deal tomorrow. I would caution CFOs against waiting until renewal time to renegotiate. Many deals can – and should - be effectively renegotiated annually, even in the middle of a multi-year term.

Aren't procurement organizations built to address this? Why leverage a third party?

Birdwell: Procurement teams leverage formal sourcing processes, executed by sourcing managers who understand the categories of spend most frequently procured by the company. However, a third party like our firm has specialized information and skills around the specific product, service, and vendor in question. It is rarely practical for a procurement team to employ an expert on the specific deal being negotiated. For example, many companies leverage an outsourced data center, but do not negotiate such deals frequently enough to allow an employee to keep their knowledge base current, or to justify the cost of such a specialized resource. By comparison, we negotiate with those vendors, for that service, on an ongoing basis on behalf of our clients. A mature sourcing organization is critical to ensuring pricing is within market. But the gap between "good" and "great" can be significant, as evidenced by the eight-figure savings we drive for our typical clients.

A final question - why "Third Law Sourcing"?

Grendi: It is a reference to the three Laws of Motion. Newton's first law highlights the effort it requires to overcome inertia. Similarly, it can be difficult to overcome pricing inertia in the existing supplier environment. And Newton's third law describes the inherent balance between action and reaction. We focus on understanding the existing environment and the impact of each element of an incumbent negotiation. This principled approach allows us to balance vendor relationships and the bottom line – which we refer to as "Third Law" Sourcing.

Interview by Sarin Kouyoumdjian-Gurunlian, Press Manager, marcus evans

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Tags: law | services | environment |



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