How simple is that?  Yet in consulting session after consulting session, we see failures to perform on these basic tasks. Let’s take a look at how these simple precepts work, and where the failure to perform occurs.

Do the research. Many sellers provide references and high-level benefit statements, such as these:

• “99 satisfied clients can’t be wrong.”
• “Our solution is highly reliable.”

These statements focus on the seller’s interests and generic values, but are not compelling.  Contrast those to these:

• “A client similar to you used our solution, and it improved their inventory turnover by 12%.”
• “As you told us, when your systems are down, and reservations cannot be taken, your lose $4000 / hour in revenue. Our solution is 20% more reliable than your present system.”

Moving from value statements about generic interests to value statements about the buyer’s interests takes research.  What issues concern them?  What are their goals and objectives?  Research takes time.  Many sellers fear the passage of time.  So they go with what they have, as unfocused and generic as it is, and hope that the buyer makes the connection on their own.

Sometimes the buyer does exactly that… when they get around to it.  This, of course, works against the fear of lost time that sellers have.  If you want the buyer to act promptly, there is no substitute for understanding their business. That takes research.

Listen very carefully. In a recent negotiations consulting session, I heard a list of client demands. “The client wants simpler contract terms and language.”  Later I heard, “The client wants different terms for the production and non-production systems.”  I stopped for a moment, and asked this: “What am I missing?  These two requests are conflicting.”  No one else had considered it.  I don’t deny that the client had a problem.  I just don’t think we knew what the problem was.

If we run around trying to satisfy every demand without listening, we are going to hit a dead end.  One of the things we see in the negotiation role-plays that we run as part of our training is a negotiation flaw related to listening.  Someone will ask a question of the other side.  For whatever reason - discomfort, time needed to make a thoughtful response, etc. - the other side will be slow in answering.  In many cases, someone else from the original team will jump in with another question or will change the subject.  The chance to learn something new and potentially valuable is lost.  The author of the article gets it right again.  Listen very carefully.

Act decisively for the long term. One of our clients was asked to quote a sale price for products including 4 years of maintenance.  She dutifully went off to get approval to do it, and found out that it was so hard internally to figure out how to do it that they were willing to give the fourth year of maintenance away for free.  This salesperson worked where the business model was to do complete replacements every 3 years, including new product and service.

It is not unlike a car lease for cars where maintenance is included (BMW or Audi, for example, in the US).  If she gave away the fourth year of maintenance, then she would lose the replacement sale 3 years out - the customer’s incentive to act would be significantly reduced if the system is still performing well.  We advised her to wait before giving it away - or to at least ask for a corresponding concession from the client.  She waited, and the client never brought it up again.  Business decisions with significant investments are long term decisions for the buyer.  The seller should remember that their own actions also affect the long term.

Now…does the Nova Scotia Business Journal really know something you don’t?  Or are you just forgetting the basics in a rush to close?  Remember: do the research, listen very carefully and act decisively for the long term.  (td)

Having had many of these discussions lately, one thing struck me as a pervasive problem.  Many sellers who consulted with us said something like this: “Procurement told me that they need to reduce costs with us to 10% below last year’s spend.  I have a plan to do it, and with that plan I think I can close this deal by year end.”  To me, this is Procurement asking for a Ferrari (or for any other very hard to obtain item).  Let’s talk about why.

Let’s recall the K&R Negotiation Success Range^TM.  The NSR^TM is a tool for analyzing the range in which both parties can succeed in a negotiation.  It is often used with price, but can apply to service level agreements, completion dates or other factors which have ranges.  In working toward the NSR^TM, each side will make an initial offer.  In almost all cases, the parties believe that there will end up being some movement in the offer - initial offers are not usually final.  Because of this, a plan that says, “Let’s meet Procurement’s 10% goal” will usually end up leaving money on the table that the seller could get.

In one of our sessions, I asked the seller if he considered that if he met the 10%, that Procurement might decide that 10% was not really the number, and ask for 12%.  He replied, “They have done that before.”  Apparently it wasn’t a sufficient learning experience.  Most of the time, if the stated goal is 10%, the real goal is somewhat less, and it worth your while to work on finding out how much less.  That return will not only count this time, but it will affect your starting negotiation next time.  The payback for sellers can be large.

Also, the business value that your solution generates should be related to the cost. In addition to the NSR considerations above, a number of the people we worked with had clients that were growing at 30% a year.  Procurement still asked for a 10% year-over-year savings. If your products or services are useful in either supporting or generating that client growth, you should consider if it is reasonable to support all rates of business growth with the same cost reduction target. Many times it isn’t.  Perhaps cost as a percent of revenue could decline by 10%, but on an absolute basis, it may be completely unreasonable to ask for and get a flat 10% reduction.  Procurement (again) asks for and gets a Ferrari.

I told my wife I wanted a Ferrari. I’m driving a Honda Civic Si.  I really like it. A real-life example of the difference between an initial offer and an acceptable alternative which is some (considerable) distance from that initial offer.  I don’t even think about the Ferrari anymore. Much.  (td)

The unknown technical issue was rumored to be internal to a proprietary software solution Netflix uses to manage their movie reservation/shipping/check-in/check-out processes.   The head of Netflix operations actually posted some status on their blog on Tuesday, apologizing for the problem.  He posted again on Wednesday, then two more times on Thursday. All shipping function was not yet restored when we started this article.

How does this relate to value and sales? The best sales arguments compel action based on a reward if you take action (buy) or a risk if you don’t. If you read the various articles about the outage, a relevant set of facts can be easily found, and those facts provide the base not only to make such an argument, but to put a number on it (quantify it).

Some key info:

• Up to 1/3 of the Netflix 8.4-million-person customer base was affected
• Netflix ships around 2 million DVDs/day
• Netflix has promised credits to those affected.
• This problem has happened before, for a shorter time, and credits were up to 10% of a month’s fees.
• Monthly fees range from $5 to $24, with the most popular plan at $17

First, as a seller, you need to have a solution. In this case, it might be a services offering that more rapidly fixes the problem, or (the option we will go with) a new software system to manage their distribution and reservations.   Suspend disbelief for a few moments, since we don’t really know what the problem is or what caused it, and imagine further that Netflix is soliciting replacement solutions for their software systems.

Here’s your argument: “Our new distribution and reservation software provides you with the functions that you told us you needed at a price of only $2.3M – and it NEVER FAILS!   Your most recent outage using your proprietary system cost you $4.7M.  All of that was profit, which was brought up by shareholders at your annual meeting.   Similar outages are happening at the rate of 2 per year.  The ROI for your investment in our product is ½ an outage.  Please sign here.”

Now, there are issues with the argument. You wouldn’t want to poke them in the eye quite so much and cause resentment.   You would have to address a comparison to the costs of an internal solution, which are likely to be less than a total replacement (if technically feasible – you should try to find out).   You would have to address the other competitive alternatives, if there were any.  They are likely to ask for guarantees.  And (this is a good one) if your argument is true, you might not be charging enough for your solution – the payback is too good.  You might be able to match the price and value more closely (by which we mean, raise your price).

However, issues aside, this fundamental method of making the argument is a good one. You know the specific, quantified value of your solution, and you use this information in your sales argument. In our experience, most sellers fail in this step. They assume the buyer knows the value, don’t do their homework, and end up with a sales proposal that is significantly weaker than it could be.

You’ll raise your odds of closing the deal, and it will close sooner. (td)

Let’s look at another “Oh No Mr. Bill!” argument, this time for patents.

In 2005, a string of lawsuits began between Qualcomm and Nokia, after Nokia’s license to use Qualcomm patents had expired.  It is a certainty that Qualcomm, in advance of that expiration, warned (or “threatened” - take your pick) Nokia that failure to renew would cause any number of catastrophes for Nokia, up to and including a complete inability to ship their products because of injunctions Qualcomm would win in court.  If they were smart (see our “Value” articles), Qualcomm quantified the revenue impact that this would have on Nokia, and the subsequent stock losses.  Oh No, Mr. Bill!

As K&R would predict, these arguments failed to motivate Nokia to act before the expiration of the agreement.  Instead, there have been 3 years of lawsuits and countersuits, including a complaint from Nokia to the EOC about Qualcomm’s behavior.

Yet recently, they settled.  Why?  Several factors combined to ratchet up the Negotiation Leverage that could be brought to bear. No single article we read had all the factors in it.

First, one of the reported key technology patents that Qualcomm owns is related to Long-Term-Evolution (LTE).  LTE is a technology that most cell service providers plan to deploy in 2010.  This creates a negotiation “timestamp” which is outside of Nokia’s control, but which is critical to their ability to remain competitive in selling phones to their clients.  Given the likely development timeline for phones, Nokia had to either settle soon or find an alternative technology.  Without one or the other, the risk to their revenue becomes real. The approach of that timestamp creates leverage for Qualcomm. Nokia could counter only it if they had a real technical alternative or if they settled.

Second, the actual patent infringement case was about to begin.  The settlement came on the same day that the case was scheduled to start.  The start of the trial was actually delayed one day to allow the settlement conversations to continue.  The start date probably created leverage on both parties, but to a greater degree on Nokia.  Court costs are not insubstantial, so Qualcomm cares about that.  However, there are both court costs and the risk of an injunction affecting Nokia.  The greater leverage probably bears on Nokia, and accrues to Qualcomm.

Third, the settlement also came one day after a German court invalidated a key Qualcomm GSM patent.  This raises the risk of additional invalidations, and decreases the certainty of a licensing payout from Nokia to Qualcomm, adding leverage for Nokia.

This Qualcomm/Nokia story shows another example the big difference between the threat of catastrophe and its reality.  The threat sounded imminent, but in reality, it was 3 years away.

Don’t make this mistake when you negotiate.  Understand your real Negotiation Leverage position.  When you are negotiating, think about what is causing leverage - on you, and on the other side.  Don’t fall for the “Oh No Mr. Bill!” argument.  Make sure your logic is sound, and based on real risks and rewards.

Oh, one last thing.  Qualcomm and Nokia signed a 15-year agreement.  We’ll check back in 2023, when the leverage starts building up to interesting levels again.  (td)

• Your software is already installed and in production, or your services team has completed 2 phases of a 3 phase implementation project. You have leverage when additional licenses are required for the same task, or when phase 3 of the project starts, because your software or services team is proven, and there is a cost of conversion to move to another alternative.

• Leverage can be related to time (such as end-of-life). When cars are leased, there is leverage on the buyer (leasing party) to make a decision at the point of the lease expiration (or slightly before). This leverage is created because of the problems related to loss of transportation if the decision is not made before the leased car must be returned. Conversely, there is very little leverage available to convince the buyer to make a decision just a few weeks or months after the lease is first signed. The risk of lost transportation does not exist yet.

• Value provides leverage. If I can offer you a guarantee of 4% on your money, versus first-half-2008 stock market performance, I can get you to accept an alternative (a “low” return on your money) that in a bull market is unattractive.

From time to time, K&R consults on sales situations that are forecasted to close predicated on the end-of-life or withdrawal from marketing of a software product, and the corresponding lack of availability of standard support services for that product.  In nearly every case, we find that the situation is not as clear as the seller suggests it is (or wants it to be).

Normally, this is what we hear: “Product X is going end-of-life in 180 days. My customer won’t be able to accept the risk of running production systems on it after that date.  The time it takes to convert to my (better) Product Y is 60 days.  So, I am forecasting that we will close the deal on Y in 120 days or less.  This is a sure win.” Think of it as the “Oh No Mr. Bill!”^[1] argument.

In nearly every case, this will be insufficient to win the sale.

Here are the flaws:

• The heart of the “Oh No Mr. Bill!” argument is the fear of catastrophe. The argument presumes that end-of-life means a failure will occur, and that the impact to a production system will be severe. In fact, the opposite is often true. In many cases, an end-of-life product has had additional versions released, all of which the buyer has declined to buy. This likely means that the failure history is acceptable, which is likely to continue. After all, the software doesn’t know about the end-of-life date. The failure history may be acceptable because the work performed is not critical, or because the failures don’t happen. The “Oh No Mr. Bill!” argument confuses what is possible with what is likely.

• Even if the risk of failure is real, the argument fails to persuasively articulate the risk of that failure. A more effective method to describe it would follow these lines, “If the system fails, you will be unable to register your incoming students on-line for the fall semester. You’ll have to fall back to manual processes. Your expense will rise by $7 million. Your client (student) satisfaction will plummet, and you may lose enrollment.” This argument links failure with the costs and implications of the failure. The implications are described in terms that the client (in this case a university) would find important. Without this sort of description, the seller is assuming the buyer will connect the risks to the consequences by themselves.

• However, in many cases the argument above will be hard to make. If such failures were occurring with any regularity, and the risks (business impacts) were real, then the likelihood of the client still using the nearly-end-of-life product would be low.

The answer lies in the approaches we have laid out before (see our articles in the “Value” section).  Buyers need to understand the business value of a solution to be motivated to act. Fear-mongering alone (”Oh No Mr. Bill!”) won’t do it.

Not convinced? Let’s take a short look at a relevant real-life example - Windows XP and Vista.

Microsoft’s experience in providing Vista as an upgrade/replacement/whatever for XP has been written about at least 740,000 times according to Google.  We’ll assume that you have read some of those. While not an end-of-life scenario, it is a step in that direction.  Microsoft made value arguments to XP users - they were only modestly effective in driving the conversion to Vista.  Many people weighed stability, conversion cost, breadth of support, mixed platform considerations and more against the added business value of Vista.  Many people stuck with, and continued to install, XP.  Microsoft delayed the end-of-marketing date at least once.  After end-of-marketing, almost every major PC/laptop vendor today offers an “XP downgrade” program for systems that must (by Microsoft’s terms) come preloaded with Vista.  Microsoft has itself described situations to get around its own marketing rules, which allow netbooks and others to continue with XP. One interpretation of this is that they mis-assessed the leverage they had to force buyers to move. Another interpretation is that they tried to force movement to Vista with an artificial “expiration date”, not with business value.

Don’t make the same mistake - look beyond “Oh No Mr. Bill!” when you are trying to close a sale. (td)

First: a certain logic is at the heart of this argument.  One version goes like this:  “Price is a shorthand description of customer value, and a lower price is better because it makes the same value available for less.”  There are a few negotiation issues with this logic.  The primary one is that price does not describe value.  As negotiators, we have defined a rule: “You can ask any price that you want (repeat twice)”.  The seller’s initial offer (often starting at a list price) can be arbitrarily set.  Examples abound of software that sells at or near list price and of software where typical discounts exceed 50%.  A smart buyer will understand that list price is a reference point, not a value statement.  In fact, value for a given software package always starts at $0.  After all, if a lower price is better (from our opening “sales argument”), then isn’t free as valuable as something can be?

Second: welcome to the world of Open Source.  Almost no one (any more) falls for this reverse argument to the one we started with above: “Since price is a shorthand description of value, and since you don’t charge, your software has no value.”  (We’ll ignore for the moment the complexities of support, update, risk and so on, and just concentrate of acquisition costs.)  As a simple example, if Open Office and Microsoft Office both include the ability to create documents (and more), but one is free and one retails for about $400, at least one of them is mispriced.  Differentiation is key to determining which one - and this differentiation varies by user.  Which leads to…

Third: Value is determined by the buyer.  Every buyer is a niche market with exactly one member.  Sellers who mistake those buyers for generic opportunities for their products and solutions will be significantly less successful.

As a buyer - remember that your best position in a negotiation is a set of realistic, competitive options.  As a seller - remember that your price is driven by your ability to convincingly portray your solution as “the only one that can do the job”.  The struggle over position on the leverage slope is the real negotiation - if you win that struggle, the pricing discussions will be more rewarding for your side. (TD)

What happened on the NCE?

A recent Business Daily Africa article noted that weekly auction prices for coffee were up six weeks in a row, to a 12-year high.  This is interesting, and the price rise is attributed in the article first to the fact that coffee is not considered discretionary by consumers.  Like commuting costs, coffee costs are “mandatory”, and sales do not contract in response to price increases.  One of the things about non-discretionary purchases is that if your offerings fit this description, someone will get the sale.  For sellers, that’s a real plus.

Lesson 1: Your first task as a IT seller is to convince the buyer that your offering is mandatory, not discretionary.  Well-known external, regulatory-based examples of this include HIPPA compliance and Basel II (Sarbanes-Oxley) compliance.  Another “mandatory” class of fixes came around Y2K.  Internally-driven goals (from annual reports, for example), can become mandatory because they are public.  So first, do what you can to make it mandatory for the buyer to have a solution.  That solves half of the problem - the business will close. But who will win it?  If the solution is a true commodity, your odds of winning are strongly related to your price.

Back to the NCE. The second pressure on prices was a perceived lack of future supply on the New York Futures market.  A mandatory item, limited supply, higher prices.  That’s interesting, but a single seller can’t usually control this (or they would be a monopoly).  As a seller, how do you prevent your offering from being a “commodity” if you can’t control supply?

On the NCE, coffee is sold by grade.  The top grade, AA, was selling for between $168 and $353 per 50-kilogram bag.  That’s a wide price range for a commodity.  If even a similarly-graded commodity (raw coffee beans) can change in price by over 100%, how do they do it?  And how can a technology seller learn from that?

In the IT space, an offering is a commodity if buyers feel that they can choose the same thing from several (or many) suppliers.  While it is true that this will generally make the negotiation appear to be about price, we’ll offer a different perspective.  The true negotiation is about how good a job the sellers do in dispelling the buyer’s belief that “the same thing” is available from several sources.   If the seller fails at this task, then the final negotiation will be largely pre-determined, over price, and in the buyer’s favor.

On the NCE, the answer lies in “non-graded” aspects of the beans.  Depending on the bean, additional descriptors can be added: “fair trade”, “shade grown”, “sustainable”, or “organic”.  The local diner may not care about these descriptions.  The local coffee roaster will, as will their “more discriminating” clientele.  Using these characteristics, which add uniqueness, will turn a commodity at $168/bag into a commodity at $353/bag.

Lesson 2: Understand your buyer and the buyer’s true interests.  Using this knowledge, you will almost always be able to describe your solution in ways that are unique, which will in turn move you toward “high priced commodity” status.  This in turn will result in more revenue and more money for you. (TD)

Monopoly power allows the party who holds it to do things that their client base doesn’t like.  A simple, current example: Microsoft announced some time ago that Windows XP would no longer be available for retail sale (or sale with new computers) after June 30, 2008.  The user base is not so happy about this, as the Microsoft alternative (Vista, in its various forms) has significant issues of support, and requires more expensive systems to run it effectively.  Petitions and user outcry had no impact on the decision.  After all, as pretty much a monopoly in this market space, who can stop them? (Please don’t send us any Apple objections; this article is not about that.) However… 

Enter the OLPC, ASUS Eee PC and others.  Sales are booming, and prices are low.  An entry Eee PC sells for $299.  The OEM price of a copy of Windows XP is rumored to be $120.  The original Eee ran Linux, not Windows.  Windows wasn’t affordable.  The buyers decided that a Linux solution “satisfied the business need.”  The popularity of these machines and the unpopularity of Microsoft’s position combined to break the monopoly pricing position.  As of now, Microsoft is apparently willing to again offer Windows XP to OEMs of similar machines, at a price of about $40, until June 30, 2010.

Realistic alternatives for buyers can have a tremendous impact on prices and negotiating positions (such as dates of sale).  A 67% price drop is a big one.  For Microsoft to hold their price, they needed to convince the buyers that there was something they would get from Windows that they could not get from Linux - they failed at that.

As a buyer - remember that your best friend in a negotiation is a set of realistic, competitive options.  As a seller - remember that your price is driven by your ability to convincingly portray your solution as “the only one that can do the job”.  The struggle over position on the leverage slope is the real negotiation - if you win that struggle, the pricing discussions will be more rewarding for your side. (TD)