VENDOR RENEWAL AGREEMENTS… THINGS AREN’T ALWAYS AS THEY SEEM
VENDOR RENEWALS OFTEN GET A “CHECK THE BOX” TREATMENT. HERE’S A TRUE STORY ABOUT A VENDOR RENEWAL THAT SEEMED FAIRLY ROUTINE… UNTIL IT WASN’T.
Brian Bahnsen
Sourcing and Vendor Management Consultant
“You just don’t understand how we price things!”, he exclaimed.
Obviously, I reached an inflection point with “John”, the executive representing a vendor during the negotiation of a particular renewal agreement. The Client “Dan”, an executive of a financial services company, had a long-standing, reasonably healthy relationship with John. Dan valued the results achieved using both the software and supporting services provided by John’s company.
The relationship between John and Dan spilled outside the work environment to include activities mostly centered around golf outings. Nothing wrong with that, if you can maintain objectivity when it comes to the business that makes all the rest of that possible.
Dan was able to accomplish that objectivity, as evidenced by choosing to engage us to manage the renewal negotiation. John, not so much. We’ll come back to that in just a moment.
Important side note: objectivity is the linchpin for any negotiation. Without it, a person negotiating a deal will not achieve a win-win outcome. As a reminder, the definition of objectivity is “freedom from bias; the ability to refrain from emotional interference in evaluations and decisions.” Keep in mind, if there’s a good relationship, objectivity is going to be more difficult to achieve without help from a third party professional.
Based on the relationship, John was alarmed that Dan chose to introduce a third party. But you could say John fired the first shot when the renewal agreement came in with a 29% increase in the price. While all this seems to be heading down an adversarial path, it was not Dan’s intention.
Again, he valued the results and the relationship, but things needed to be fair...and fairness was now in question.
As far as Dan and his team could tell, not much had changed in the solution itself...not when measured against value achieved. John didn’t see it that way. In fact, he was making a case that services were “enhanced” to include data analysis and recommendations that, if acted upon, would deliver tangible P&L impact to the tune of millions.
John was right about the potential impact. But what he didn’t see, because he couldn’t, was that there were other risk factors outside his team’s scope. These risks rendered the recommendations moot, and therefore without value.
Unfortunately for John, and Dan...and everyone else involved, John didn’t want to have a reasonable discussion about it. This became all too clear when he refused multiple meeting requests and chose only to communicate by email.
John’s attitude raised a red flag for Dan and team, but it got worse.
John took a final hard line on the renewal pricing and “went dark”. John is the vendor...a vendor going all in on his perceived leverage with a long-time client that represented approximately 12% of his company’s revenue. Obviously, he was committed to his position.
So Dan and team had a choice: cave and accept the terms so they could move on with their lives. Or, they could see this for the opportunity it represented.
They chose the latter and it proved to be a valuable exercise. With a small investment of time dedicated to thoughtfully, objectively evaluating their situation, they considered the very real scenario of not renewing with John. That would mean they would need to consider the opportunity cost (and return) of bringing in another vendor or bringing the work in-house.
Some research informed the team that there wasn’t a suitable vendor alternative. So they focused on the in-house option. After doing the math, it proved to be a viable option when compared to the vendor renewal offered by John. When compared to the vendor renewal they requested from John, the in-house option held up financially. But the cost of transition would be difficult in terms of time and productivity.
The conclusion was that the in-house option was real and a viable point of leverage...one they didn’t have in the beginning. So we used it.
We again presented a reasonable counter proposal, but this time with even more favorable terms for Dan and team. Based on information from John and our evaluation of that information, the vendor would still keep the business and make a fair profit.
But now there was an important distinction from previous discussions: the alternative for John. Take this win-win deal or lose the business. He chose the win-win.
So what are the lessons learned from this story?
Opportunity. A vendor renewal agreement represents an opportunity to test and adjust fit for your business. In most cases, business needs change over time. Make sure your agreement fits. In this case the agreement was one size too big. In some cases your business needs may outpace your agreement size. Either way, fitting a win-win is the best way to ensure both parties achieve value.
Objectivity. Maintain objectivity throughout any negotiation and you will make a more informed decision in the end. Objectivity is merely an exercise in thinking through your options without bias of emotional interference. Being objective represents freedom for you and your organization. It represents empowerment for seeing the truth of things that must be seen to make a wise decision.
Time. Give yourself and your team enough of it to get a renewal negotiation done right. It is difficult to properly evaluate your partnership and agreement for “fit” when under the pressure of a short timeline. While there are occasional instances where a short timeline can be an advantage, it is indeed rare. Time gives you leverage. Use it wisely!
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