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How to prepare for a major contract negotiation

"Be Prepared"

This article has been contributed by Daryl Ullman from Emerset. The article is an extract from Daryl’s recently updated book ‘Negotiating with Microsoft‘.

While individual users purchase a license or two from a supplier or perhaps from the Internet, large corporations obtain their software in a process that can and should take many months of preparation and negotiation.

This is true with specialized software required for your industry or business, and this is true of all the Microsoft, IBM, Oracle and SAP products used throughout your enterprise. Literally, millions of dollars can be saved or lost, based on the amount of preparation, how much strategizing and planning you do, and finally how you conduct the negotiations with software vendors.

Ultimately, your company and the software vendor have at least one major thing in common: a need to conclude an agreement. But how good that agreement will be for your company depends first and foremost on you, not the vendor.

Here are a few pointers before you get to the negotiation stages.

Prepare Thoroughly

One of the most basic mistakes you can make when negotiating is to come to the negotiations without adequate preparations. It is important to understand that the process of negotiating does not begin at the moment your team first meets the vendor team across the negotiation table, but many months before. In most cases, you will find that the efforts you make prior to beginning the negotiation process are easily as important and play as significant a role in achieving a successful outcome as the actual time you are meeting and discussing terms with the vendor’s agents.

Organizations (actually individuals, because every negotiation is conducted by people) do not spend enough time on these important pre-negotiation steps:

  • Gathering the required internal data.
  • Analyzing that data.
  • Looking at future plans.
  • Defining the desired outcome of the negotiations.
  • Understanding the goals of the other side.

The inevitable outcome of neglecting these issues is poor negotiation results. Similarly, the inevitable outcome of proper preparation, research, strategizing, and negotiation is a software licensing agreement that saves your company money and/or includes more or better software licenses.

Set Clear Goals

Setting realistic and achievable goals is essential to a successful negotiation. Well defined goals will determine your strategy and tactics, enable you to determine when you have reached a successful outcome, and establish your “red lines” or reservation points (what is unacceptable).

Failure to identify these limits up-front can lead you or your company to accept terms that are lower than what you expected and likely will be regretted in the future.

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Define your BATNA

This is an acronym for “Best Alternative to a Negotiated Agreement” (Fisher, Ury and Patton, 1991). In simple terms, the strategy is to prepare at least two or three alternate options to your planned outcome. This means determining the point at which you are prepared to leave the negotiation table, or at which you will accept terms that are better than your original goal.

These are not the goals you set out to achieve in the negotiation process; rather they are potential alternatives to consider.

Understand how the software vendor works

Just as you need to determine your own goals, reservation points and BATNA, you need to do the same for the software vendor. By understanding the software vendor’s interests and goals, you are better able to understand the obstacles you are likely to face at the negotiation table.

Such information can be gleaned from a variety of sources, including unofficial discussions with your software vendor’s Account Manager. The vendor sets very high goals for Account Managers – typically, they are expected to increase the licensing revenue from your previous or current agreement by between 15-20%. Part of your preparation should include making a list of the decision makers on the vendor side and understanding who has the ability to agree to concessions. Each vendor has a structured approach to negotiating agreements that involves setting out rules at different levels of the organizational pyramid that determine when and by whom concessions can be made.

Choose When to Negotiate

The accepted ideal is at the end of the calendar year, when companies are looking to close their sales objectives. In some cases, the end of the fiscal year does not coincide with the end of the calendar year. For instance, at Microsoft, the fiscal year ends June 30. As a result, a set of promotions come out around April or May in order to increase sales. In the past, there was a thirty day grace period for renewing an enterprise agreement but this has been removed and therefore you must factor the lack of this time when calculating when you need to approach Microsoft. Discounts that are currently defined in your licensing agreement will not be honored beyond the agreement renewal date.

Because Account Managers know that they will be penalized if their account agreements are not renewed in time, they will increase the pressure to close the negotiation cycle as the date draws near. As you begin considering your options, check whether a given promotion is relevant to your geographical location; often promotions are limited to specific countries (this information can be obtained from your Reseller). Once you know when you want to begin negotiating, you must schedule additional time for your pre- negotiation preparation and research. If you wait until the software vendor approaches you, the opportunity to choose when to negotiate may be lost. The closer you get to the renewal date, the less time you have and the more pressure you will experience – both from the vendor and from within your organization.

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Know what to negotiate

Knowing where not to spend your time and effort is sometimes more important than where you do choose to focus. There are certain concessions that are pre-determined by the software vendor and others that are easier to negotiate than others. Smart negotiators will focus on issues of pricing, product mix, agreement duration, payment terms and other negotiable topics.

Get Everything in Writing

Have all agreements regarding concessions, special terms and conditions drafted into a formal document that is part of the overall set of official statements set out in the software licensing agreement.

Do not accept local subsidiary letters, mailed notes or verbal promises, as none of these have any legal status. Document all offerings made during the discussions and make sure they appear in the final agreement before it is signed. Too often, negotiators offer additional benefits during the negotiation process that do not appear in the final agreement. Only later does the company discover the discrepancy, and by then, it is too late. If it is not in the agreement, as far as the law and the vendor consider it, it does not exist.

This article has been contributed by Daryl Ullman from Emerset. The article is an extract from Daryl’s recently updated book ‘Negotiating with Microsoft‘.

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