Negotiations

“Meet the Market” vs. “Make the Market” – Why Greed Isn’t Good for Negotiating Outsourcing Deals

Contract negotiations for IT and network services are not for the faint of heart. Millions of dollars are at stake and account teams face intense pressure to win the deal and deliver a healthy margin. Customers, meanwhile, seek to leverage the power they wield by virtue of deciding who wins or keeps the business.  The dynamic nature of the IT and network marketplace only heightens the intensity of the negotiation process.  Competition and technology innovation exert steady downward pressure on pricing, so that the terms of a newly signed contract begin to trend toward obsolescence before the ink is dry.

In this environment, clients may be tempted to wield a big hammer, demanding deep pricing reductions that go beyond market trends. Given the eagerness of incumbents to retain business and of competitors to unseat those incumbents, this approach can be relatively successful – but it’s short-sighted and ultimately counterproductive.

Consider: if an established and well-documented pricing benchmark or database pegs the leading price for a given IT service , at $100, and a client unnaturally strong-arms a provider into agreeing to $75, the provider is immediately in a hole – and will immediately look for ways to recoup the lost revenue, either by diligently finding reasons to bill add-on charges for out-of-scope work, by charging higher-than-market pricing for other services or by ensuring that the lowest-cost resources do the lion’s share of work on the account. Regardless, the relationship quickly loses any semblance of strategic partnership and devolves into contentious nickel-and-diming.

A more effective approach for both client and provider is to target a close range within the leading price – for that $100 that accurately reflects the current state of the market as broadly defined over a sizable data pool and example set.  If both parties agree that the price is competitive based on the leverage profile of the engagement, the conversation can shift to substantive areas such as SLAs, technology capabilities and service support and how to drive innovation and business benefits. Fair market pricing is just that, fair and at market.

The key to achieving that transparency into the market – the transparency that precludes the need to haggle over pricing – is insight into technology trends and access to a broad and deep repository of market data, coupled with a flexible and agile benchmarking methodology that identifies the gap between existing pricing and the market opportunity.

Equipped with data that is relevant, accurate and up to date, and with analytical tools to quickly assess a business’ competitive positioning, clients and providers can establish a footing for a meaningful, collaborative and strategic dialogue.

About the author

As a telecom advisor and negotiator Phil specializes in telecommunications network sourcing and outsourcing projects, including long-term telecom outsourcing deals for large companies, and skillfully assists his clients in assessing their current telecom services without sacrificing the quality of the relationship between the client and telecom carrier.