In yesterday’s Strategy Check Newsletter, titled Cut Costs Now by Renegotiating with Suppliers and Vendors, we examined the opportunities for cost-cutting that exist in our environments due to the economic downturn. Right now, many businesses are turning to renegotiating the terms of their contracts with vendors and suppliers in order to save their organizations money and secure their long-term viability.
But, one important thing to remember is that once the economic crisis has ended and business has gone back to normal, you’ll still be working with many of those vendors- and you don’t want to burn your long-term relationship now, just for savings today.
One of the articles that we referenced, from Network World, highlights the practice of re negotiations in Indian technology firms, specifically detailing how some companies are taking the short-term route of forcing suppliers into accepting unfavorable provisions and damaging long-term relationships.
Of particular financial pain to vendors, he continues, are software deals that, as a study from Accenture points out, are “being clinched largely on the strength of off-list discounts of up to 70%.”
Evidently, that isn’t a sustainable way to do business. And smart CIOs look for everyone’s best interests — even their vendors’, says the CIO of a pharma company. He says that he focuses on coming up with alternative options to these discounts that are discussed in a spirit of partnership.
That spirit of support, says industry watchers, is also complementary to the way business is done in India, where relationships count. Many CIOs agree that relationships can sometimes be deal clinchers and so it only follows that when it’s time for renegotiations, relationships play an important role. “We stress the importance of the relationship we both enjoy and how it is up to both parties to ensure that it survives,” says Suresh Kumar, Director-IT, KPMG
The important thing to remember here is that every organization exists within an ecosystem. Right now, almost all of those ecosystems have been negatively effected by the current economic crisis, and every member relies on the success of one another, to some extent. If squeezing too hard on a supplier damages their long-term viability, then you may be threatened yourself when they’re no longer around. Furthermore, you’ll be sitting down to negotiate again some time after the crisis is averted, and you’d much rather have an ally across the table rather than an adversary who carries a grudge.
If you plan to begin the negotiation conversation by bringing up market value, or even more favorable competitor pricing, be aware of the message you’re sending: “we’re considering leaving you and willing to do it.” This can start things off badly by putting your vendor in a defensive posture- it can feel more like arm-twisting and less like an attempt to find a win-win situation. Instead, make sure that you’ve figured out a situation that you feel works well for both parties. Networkworld’s article explains the same sentiment shared by Indian companies as such:
Fortunately for vendors, many CIOs agree with Sahai and reject the idea of browbeating their vendors into submission. They say that strong relationships and knowing a vendor’s senior management on first name basis, all help in a renegotiating process, but what really clinches things is having an alternative option before a negotiation.And, all it takes to put those tricks up your sleeve is some homework. Some skillful negotiators will, for example, ensure that they thoroughly understand the market and the product.
Remember, we’re all in this together. The economic crisis has caused many business leaders to think short-term, and in their own interests, but that won’t help in the big picture. Instead of getting caught in that trap, use sound strategy and long-term business practices that strengthen the relationships you have with the organizations you rely on.