How To Win the Beauty Contest
In last month's feature, I discussed certain things that buyers should do to maximize their chances of getting the best deal for their outsourcing buck. This month, I provide some pointers for vendors that should go a long way towards impressing buyers and expediting the closure of a deal. Although every deal has its own nuances and improvisations that take place as the negotiation unfolds, I recently completed a large data center outsourcing deal that was instructive because it reflected many DOs and DON'Ts that vendors should keep in mind.
The Primacy of Price
Everyone in the outsourcing field knows that price will always be an ultra-important factor when buyers select their finalists because the perception that one is getting "a deal" is always enticing to anyone at any level. Despite the various disclaimers buyers write into their Requests For Proposal (RFP) that the "best overall" proposal will prevail - as opposed to the lowest cost proposal - price is usually still king. And if the goal of the outsourcing is to save money, price will absolutely get the lion's share of attention by the chief financial officer (CFO) and the bean counter team.
Although many vendors try to justify their price based on their uniqueness, the cold reality is that few vendors are able to command a large premium for a service that is not unique enough to merit it. The buyer's philosophy is: Why buy a Cadillac when you don't need one? As a general rule, unless the balance of a proposal is unacceptable or the vendor is a marginal player, a low bid usually gets a shot at the title.
After vendors have submitted their original bids, the more astute ones never increase it. Absent extraordinary circumstances of non-disclosure in the RFP or changes to the deal that may have transpired during negotiations, the rule is that price never goes up. Vendors who violate this rule are seen as trying to squeak out some extra dollars through the back door and are often shown the exit door.
Vendors who are good at the pricing game usually build in a few "cost" layers that can be peeled away without a significant impact on the target margins and agree to do so during the early rounds of the beauty contest. This technique, although transparent, usually scores points in early, post-negotiation discussions between the buyer and its advisors.
Apart from price, there are other factors that influence whether a bid will win. One significant factor is the overall reputation of the vendor, which, in itself, has many sub-components such as market share, specialization, service quality, flexibility, and an "adversarial" versus "partnering" philosophy. Sometimes the best indicator of a vendor's corporate philosophy is the way it has handled a termination or transition event. In larger deals, a reputation for being a leader in the field usually means progression to the penultimate round of the selection process.
Nix Combative Negotiations
Obviously, it would be wrong for client-side counsel to think that a legal-oriented process like a negotiation will be the only factor determining the winning vendor. It would be equally foolish, however, for vendors to ignore the potential impact of a negative and lasting first impression that can emerge from a combative negotiation session.
I have recently witnessed the leader in its field and the front-runner of a very large deal ultimately lose on this very point, so do not dismiss this as rhetoric!
My premise is that the vendor must approach negotiations as a "partner." In fact, the winning vendor must be prepared to be the "junior partner" because, at the end of the day, even though the vendor may be running the backbone of the operation - the data network, for example - the "operation" itself (i.e. the business) is the only reason that the backbone exists. This is something that is lost on many vendors in the heat of negotiations often with disastrous consequences.
Five Tips for Vendors
In my time at the negotiation table, I have observed the good, the bad and the ugly. Here are five tips that should help vendor teams avoid being (or being seen as) the bottleneck standing between their company and the closing of an outsourcing deal.
1. Live with the buyer's outsourcing agreement.
Many vendors have developed an outsourcing agreement they prefer to use as the base negotiating document. This may be fine if they are dealing with a small client that is not represented by experienced outsourcing counsel, but it is a non-starter for the larger buyers that I usually represent.
This may seem obvious, but it is surprising how many vendors attempt to get their language in through the back door. For example, the vendor will delete a contractual term completely and substitute its preferred language - from its vendor template - which, invariably, re-allocates a certain risk back to the client. Unless the RFP requests that the vendor provide its suggested language -- which is not the way experienced outsourcing advisors run this process -- this common vendor technique is a complete time-waster. I usually shut it down quickly.
In larger deals, the RFP will usually provide the contractual terms that are intended to apply to the deal. Prior to crafting a proposal, the vendor's legal and management team should assess the risks involved in the Terms and Conditions (Ts and Cs) and then decide on a negotiation approach rather than simply do a "core-dump" of vendor-side terms.
There is obviously some give and take in the proposal process with vendors making qualifications to the two traditional choices of answers permitted ("I agree" or "I disagree"). However, if the vendor's counsel pushes the qualification envelope too far, the buyer's team may simply qualify and score the vendor's answer as a "disagree" response during the initial round of internal evaluation. If two bids are close on other points - especially price and vendor reputation - the overly zealous legal advisor who has stretched the legal responses beyond acceptable bounds could be the difference between elimination and progressing to the next round.
My advice to the vendor team is simple: work with your counsel early and say what you mean and mean what you say regarding the proposed contractual terms. Don't attempt to wordsmith your way around difficult legal issues. The "slash and burn" approach, although convenient and tempting, may backfire and knock you out of the box immediately on the basis of simply not following instructions.
2. Assess the risks before coming to the negotiation table.
The vendor team needs to discuss and analyze the risks presented in the buyer's Ts and Cs and decide what risks are truly offensive to the organization. This is a difficult and sometimes time consuming task (i.e. a deviation on a limitation of liability (LOL) amount may require approval from high level management). But if it is done up front and in earnest, it will save cycles later in the process and go a long way in distinguishing your bid.
In my recent data center deal, one vendor did an outstanding job of coming into the term sheet discussions with a complete understanding of the risk allocations in the buyer's agreement and a well-thought-out approach which targeted very specific terms for negotiation. This was clearly a business and legal team that had worked together and knew that there were some "lumps" in the buyer's outsourcing agreement (i.e. the form provided by the buyer's counsel) that it was willing to accept. This vendor ended up displacing the front-runner because it demonstrated its flexibility and commitment to living within most of the confines of the buyer's agreement. Because of its well-prepared approach during a legal negotiation, it was able to establish a friendly dialogue with the buyer's management and thereby obtain an opportunity to further refine its financial and technical proposal. The result was the winning bid.
This approach is obviously the ideal situation but clearly not the norm. My contention is that it should be. As I get more buyer clients to commit being firm early in the process (i.e. at the first response to the RFP), it becomes easier to "encourage" vendors to stay the course during the rest of the negotiation. Over time, I think vendors will have to conform to this approach or risk being left out of the bidding.
It is quite easy to spot the proposals that the vendor sent to the legal department as the last, rushed stop before being forwarded to the buyer by the response deadline. Typically, in these proposals a lawyer has marked up the Ts and Cs trying to preserve as many legal protections as possible. The common technique is to delete or "mutualize" many terms without giving any thought as to whether this "slash and burn" approach is appropriate for the particular deal.
I am certainly not blaming the lawyer who was probably asked to provide his or her input in the few days before the proposal was due because I have been there and I can empathize. Rather, the blame rests with the overall coordinator of the vendor bid for not including an experienced legal resource on the bid team from day one. Regardless of who was at fault on the vendor's team, I will hold the whole vendor team accountable for an ill-prepared response once the first round of term sheet negotiations begins.
My advice is to get your team - including experienced counsel - organized early. Have the counsel talk through the contractual terms and risks thoroughly before putting pen to paper.
3. Bring the A-team.
An outsourcing negotiation is no time to experiment with players from the bench. This may sound elitist - and it is - but it is a fact of outsourcing life. One of the things that sank the front-runner in my recent deal was the fact that the team that sat down at the negotiation table seemed to be the "B team." They lacked an "ownership passion" and seemed content to rest on the reputation of their company. The buyer had committed the time of very senior people to sit in and listen to the first round of conceptual, term sheet discussions and the vendor team was simply not represented by the buyer's counterparts.
To make matters worse, the so-called B-team was led by a legal negotiator who did not seem in tune with the business team. At the end of the day, there were a few factors that sank the front-runner, (a significant one being the combative style). I also remember thinking that this vendor did not seem to be prepared to impress us. In fact, the attitude seemed more like: "I've got the best priced bid and I am the biggest player, so let's skip the formalities of negotiating a deal."
Clearly, this vendor gave up any advantage it had coming into the negotiation -- including the primacy of price -- by fielding a team that was simply not ready to play ball. It paid for it by losing a huge deal. Based on the follow-up call that the buyer's management received from a senior executive of the vendor, the vendor acknowledged that the team it fielded committed several CLMs (i.e., career-limiting moves) that would not go unnoticed.
4. Let the business people lead the discussion.
Another common mistake that vendors make is allowing their legal people to lead the discussion. Even on the buyer side, I always offer the buyer's lead person the option to lead the term sheet discussion. Most clients defer to me in this regard, but there have been a few instances where the lead business person on the deal, after being "prepped" on pinning the vendor down, did an outstanding job of walking through a term sheet of legal Ts and Cs. Even where the buyer has deferred to me as the lead, I insist that the buyer's business people who will remain involved after the deal closes attend the term sheet discussions and make sure that the conceptual agreements reached reflect good business sense.
On the vendor side, my preference is to have the business people lead the discussion and invite their counsel to speak on the strictly legal points that it has targeted to negotiate. If the vendor team has prepared properly, it should be easy for the business person to walk through most of the Ts and Cs with the exception of very technical legal issues like indemnities and LOLs.
Referencing my data center deal, not only did the legal negotiator take charge, but there was no noticeable interaction by the vendor's business representatives at the table even when the situation clearly called for business input. It looked and sounded like this organization was leading with a legal rather than a business approach, which ultimately left my client with a negative impression. I could not help but wonder (and comment to my client) about what approach -- litigation or cooperation -- this vendor would take if a problem arose during the term of the deal. Based on the vendor's negotiation protocol, it appeared it might opt for the former. This misstep was the death knell for the vendor's chances of winning the bid.
5. Make sure your lawyers leave their lawyer-sized egos at the door.
Leaving the lawyerly ego at the door is a difficult concept for most lawyers to grasp and adopt, but it is very necessary. Tell your lawyers to remember they are representing a company in the service business and, therefore, must adopt a service-oriented philosophy to close the deal. If your lawyer can't behave appropriately, find a new lawyer.
I understand that a vendor has hired its counsel to protect the organization against legal risks and to make sure that contractual agreements are executed in accord with company policy. There are better ways to accomplish these goals behind the scenes before getting into a live negotiation session.
At the end of the day, the outsourcing bar is a small world and what goes around comes around. If your lawyers follow my first four tips, then this last one is rarely a problem because the actual negotiation does not degenerate into a contest about winning or losing but rather about getting a reasonable agreement on those few risk areas that are really unacceptable.
Obviously, the negotiation process is trying for both the vendor and buyer organizations. But it has to be to produce the quality agreement that is necessary to entrust a vendor with the operation of a client's mission-critical processes.
George Atis is an experienced Corporate - IT/Outsourcing attorney who has represented vendors, as an in-house counsel (MCI Systemhouse, Andersen Consulting), and clients, as an attorney in private practice. Mr. Atis consults on both U.S. and Canadian based large outsourcing transactions and is currently a partner in the Toronto law firm of McMillan Binch. He can be contacted at [email protected].