How a “Great Deal” Can Be The Enemy of Optimization
Author: Steven Zolman
You’ve heard them talking about it in the hallway… the great deal they got from that supplier. Ever wonder how they knew it was a great deal? Was it based on the starting point of the negotiation in comparison to where things ended up? Was it based on the discount they achieved off the supplier’s imaginary list prices? Was it based on how well the supplier faked their disappointment at having to concede so much value? Was it based on how many times the supplier said it was the best deal they had ever given to anyone? Or, was it based on one of the oldest tricks in the book… the supplier asking them to sign a confidentiality agreement because they couldn’t possibly allow this kind of information about their pricing and terms to be known in the market?
Whatever the reason, most people believe they have excellent skills in the areas of negotiations and get great deals at the bargaining table. In fact, in a recent unscientific poll, we asked over 100 Clients if they felt they got great deals from their suppliers, and an overwhelming majority said they did. We then asked if any of them felt they were in the bottom half of the market, and very few thought they were. That means the bulk of these folks felt they were bunched up to the right side of the bell curve. Can that possibly be true? Do customers get great deals from their suppliers, or do they only believe they do? Between their own pride of negotiating great deals, and the inputs like discount rates, and savings in comparison to the starting point, as well as suppliers constantly reinforcing the fact that they are getting a great deal – it’s no wonder customers believe they get great deals.
Well, great deals are a funny thing. Sometimes, the belief that you are getting a great deal can be the enemy of making sure you are getting an optimized deal.
We were working with a Client recently who was adding additional database licensing capacity. He believed he was getting a great deal and strongly questioned our value while emphatically asserting that there was no way we could help him lower costs because he had already negotiated the very best discount available with the supplier. We were interested as to how he came to believe this, and he told us that his supplier showed him the GSA pricing discounts, and explained that it was illegal for them to sell below the GSA discounts, and therefore, he had the absolute very best discounts that they could offer.
Admittedly, we were slightly amused at the notion that government buying programs (programs that were quite possibly made most famous for things like buying $800 hammers, and $2000 toilet seats), were being used as evidence of the very best pricing vehicles available, and we were also quite entertained at the thought that the GSA deal with this supplier, the very same deal that the supplier recently settled with the Justice Department for $200M plus interest (the largest False Claims Act settlement that the GSA has ever obtained), was used as the barometer of the best market value available, but we were more interested in how a Client’s mind can so often be convinced of something based on either their own formed beliefs or supplier representations. In this case, we were able to help our client suspend disbelief that the costs of his proposed solution could likely be reduced.
While going through the process of optimization, we determined that the configuration of the proposed solution was sub-optimized, as was the transaction itself. When it came to pricing, we determined that the costs were out of market, and that the contract language did not fully protect and enable their requirements. We helped this Client optimize the structure of this investment and negotiate a more favorable deal with the supplier, ending up saving them well over 50%, and improving the strategic value of the solution as well.
In this case, the Client almost let their belief that they were getting a great deal become the enemy of an optimized investment structure. Their view that they had a great deal would have ended up costing them millions more than they needed to pay had they not worked with us to optimize the deal first. In addition, we helped the Client capture non-standard concessions in pricing and terms and conditions at the bargaining table to improve the value of the deal even more.
It may be human nature to trust the information you are receiving, even from yourself, but you should question your beliefs on whether or not you are getting a great deal, and wonder if you are creating an enemy of an optimized deal in the process.
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