Updated: Jan 18
Buying software or other IT solutions is trickier than buying any other type of product, because the price is based on value: the more you value a solution, the more the supplier can charge you. Suppliers use a repeatable process to find out what value you place on their products. For example, we know that Oracle discounts can range anywhere from 40% to 90% for the same quantity of the same product, depending on perceived value. The only way to achieve better deals is to approach your suppliers with leverage, and we’ve devised a proven leverage-building process to address this phenomenon.
Following is an overview of the 9 steps to creating and managing leverage; to learn more, we encourage you to register for our upcoming ClearEdge Academy Certification course, which is being offered online beginning on August 17.
To begin our discussion, let’s examine the top seven suppliers we see, and examine the disparity of their discounts, as well as their enviable profit margins.
Look at the SAP figures, which show that one customer gets charged $1 for a product, while another is charged $20 for the exact same product. This is achieved because salespeople prepare for deals a year or more in advance, with a methodical, pro-active approach to eliminating your leverage long before negotiations begin. This involves gathering information about your plans, inflating your switching costs, and controlling your timeline. The process enables them to figure out how much you’re willing to spend, and price the product accordingly.
To neutralize these supplier tactics, buyers need their own repeatable process to build leverage, which comes from three distinct sources:
Plan Bs: having credible alternatives and options to a deal which creates a competitive situation
Timing: making deal timing work for you instead of against you and having a long enough runway to execute the 9 best practices required for effective deal making.
Uncertainty: combining Plan Bs and Timing to convey ambiguity which keeps the supplier unsure that the deal is theirs alone.
We urge clients to assess their level of leverage before they approach each deal, and work to develop the following nine capabilities for best deal outcomes.
In short, this chart is your repeatable process to help you manage leverage. If you do these things well, the odds of you getting a best-in-class deal are consistently high.
A few words about each point:
Early Warning: you have the most leverage with a new supplier when you first engage -- before they’re able to gather information about you and skew leverage in their favor. Alternately, you have the most leverage with an existing supplier right after you’ve signed an agreement with them. If it’s a three-year deal, you have three years to come up with alternatives and manipulate the timeline in your favor to create some uncertainty. Every month you wait, things slip closer to when you must do something, and you potentially forfeit leverage.
Risk Assessment and Inspection: you’d be amazed at how often people skip this step. Consider that 80% of deals are with an incumbent supplier, and what you’ve already signed up for often dictates your obligations and renewal terms. It’s essential to inspect and understand existing contracts for risk before entering any new agreement. Use the following list of questions to drill down and add value to the buying process.
Forecast and Modelling: suppliers want you to buy as much as possible and as early as possible because it helps them maximize revenue. But buying too much or too little of a product erodes the value of any deal. For example, one customer bought two times the quantity of product needed because of an 85% discount. Despite the hefty discount, this deal was not competitive: the client got zero value out of half the licenses they purchased.
Deal Timeline Development: whether you have two months or two years, these essential activities are the same. You must collect data, assign responsibilities, assess risk, weigh options, then devise and execute a deal strategy.
Supplier Knowledge: suppliers are coin-operated. You must work to gain insight into their commission structure, their quotas and what motivates them. You must also understand who they compete with and how important your deal is to them.
Deal Option Development: there are six alternatives to consider that, if possible, should be used on almost every deal.
Of all these options, considering a competitive vendor often carries the most weight.
Information Control: this is the capability that people struggle with most. It’s because suppliers are expert at building relationships with buyers, going around sourcing, and working across an organization to mine for information. If you don’t have a plan to protect key information, you can be assured that it will be leaked, and so will your leverage.
Executive Engagement: this is important because different groups in the organization may have conflicting priorities, and you need executives involved to bridge this gap, as the chart below illustrates.
The last key capability is Messaging Development: on any given deal, you’re probably asking for pricing and discounts that exceed what your sales rep can provide. Therefore, you’ve got to develop a consistent reason that can be told up the chain-of-command at vendor’s sales organization. In order to gain concessions, your message needs to do 4 things:
Motivate the sales team to help you,
Provide them with a decision to make in your win-win scenario
Summarize your area of leverage, and
Serve to either accelerate or decelerate the deal.
Andrew Ozlowski is a Managing Director and leads the ClearEdge Academy.
This blog post was inspired by the webinar Introduction to Leverage Management. You can access the full recording to this webinar below. For a deeper dive, we urge you to sign up for our online certification program. At its conclusion, you will be equipped to elevate your profile in the organization with a proven framework for use in your next deal.