They Can Get It for You Wholesale

When Harcourt Inc. was in the market for a new software package last year, it decided to get a little outside advice before it sealed the deal. The company turned to an Atlanta consultancy, NPI, made up primarily of former technology sales executives. NPI looked at the terms offered by the vendor, compared them with pricing data that it tracks in a database, and made it clear that the price was not nearly as low as it could be. "We were so happy with how much they helped us save," says Bill Ellison, business controller for Harcourt Education IT at the Orlando-based educational publisher, "that it's almost embarrassing."

Alas, embarrassment seems to be an unexpected Achilles' heel for such boutique consulting firms. Their success may cast a client's internal procurement group in a bad light. Rather than being welcomed with open arms, some companies say they are having a difficult time being heard, even though their message should be music to CFOs' ears.

"We've been sabotaged by procurement teams that want us off their turf," says Joel Dupzyk, founder of Software Contract Solutions Inc. (SCS), a company similar to NPI. "They say, 'That's what we do, so get the hell out of here.'"

Not everyone feels that way, of course. "Why be that defensive?" says Ellison. "We want to take advantage of whatever expertise we can."

Third-party negotiators offer both expertise and plenty of data, and say they have an inside view of software-sales practices that no procurement staff could be expected to possess. "We had witnessed some ugly things for years," says Dupzyk. "Companies spend millions on software, and often they have no idea what they're doing in negotiating large deals."

NPI and SCS operate in a similar way: they encourage clients to negotiate the best contractual terms they can with a vendor, and then enter the process before the deal is finalized to see if there is any more wiggle room. SCS takes a percentage of any savings it can negotiate, while NPI charges an annual retainer of $72,000. Both companies indicate, however, that their specific business models are evolving.

That sounds like a no-lose proposition, but Dupzyk says that even in cases where SCS has saved a company more than a million dollars, it may not get a second chance. "You'd think that based on what we offer, the floodgates would open," he says. "But we have to fight tooth and nail for more business."

Jon Winsett, who joined NPI in 2003, a year after it was founded, doesn't paint the market so bleakly. But he does say, "I've heard some interesting stories about how challenging it was in our first year." He says that participation in IT industry conferences, where the company won a number of "Best Solution" awards from attendees, helped propel the business.

But Winsett does agree with Dupzyk that it can be difficult to convince companies that they have nothing to fear from such third-party firms. "In selecting the right software," he says, "companies spend 90 percent of their time evaluating competing products, and we don't touch that piece. But that last 10 percent of the process, deciding on price, requires a leap to external expertise, the level of which most IT and procurement staff just don't have."

"No one wants to believe what goes on," says Dupzyk, "but software companies do all sorts of things, like sell you software you already have, or offer you contracts with mathematical errors. These contracts are extremely hard to understand, and vendors are betting on that — they're guessing that of 15 holes you'll find only 10. And every couple of years some vendors change their models to confuse you again."

Not that companies can't do a good job on their own. At Harcourt, of the 24 deals that NPI has looked at, it could improve the price on only 7. Of those, the savings were typically in the 6-to-17.5 percent range. "And that's fine," says Ellison; "anything we can save is great. And once in a while they can step in and save you an awful lot of money. I can't think of a reason not to use a firm like this." Winsett says that about 30 percent of all deals the company evaluates are priced correctly; on the rest, he says that NPI can save clients anywhere from a few thousand dollars to more than a million dollars.

Vinnie Mirchandani, founder of Deal Architect Inc., which helps companies negotiate software, outsourcing, and other technology contracts, says, "CFOs don't realize how much fat there is in some of these contracts. In the case of software maintenance contracts, the margins are 90 percent. Even on offshore deals it may be close to 50 percent. You can't let vendors get away with that." (CFO contacted several vendors to get their views on dealing with third-party negotiators, but all declined to comment.)

Mirchandani, perhaps not doing himself any favors with corporate procurement departments, adds that, "Just as Indiana Jones pulled out that gun to shoot the guy with the sword, a software salesperson outguns a typical procurement staffer. He makes more, he knows more about the product and the overall deal, and he has attorneys who do nothing all day but develop contracts in their favor. A procurement person, who may do big IT deals only sporadically, shouldn't feel embarrassed about bringing in help."

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