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Third-party negotiators promise big savings. So why are they struggling to get noticed?
Scott Leibs, CFO Magazine
February 1, 2006
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."
Chuck Redpath, CIO at The C.P. Hall Co., a specialty chemical manufacturer and distributor, is also an NPI client, and he sees other advantages to using such companies. "I was having a hard time finding alternative vendors for one technology," he says, "and NPI helped identify companies that I could compare with my current supplier. It saved me from having to research an area I wasn't that well versed in."
Winsett says that NPI focuses on price, not vendor selection, and has no relationship or affiliation with any IT vendors. "We concentrate on comparing a proposed price to what we know other companies are paying," he says. That knowledge comes from a variety of sources, including NPI's client base and internal research efforts that include an extensive network of industry contacts, Internet sources such as blogs, and other proprietary techniques. He adds that this research aspect is becoming a key part of the business, and that NPI may devote more effort to providing broad transparency into IT prices in an automated way rather than via individual consulting assignments. "We even considered pitching something to Google," he says.
For now, though, the arduous work of persuasion remains the priority. Not only must these firms smooth the waters with procurement, but often they have to assure clients that bringing in a third party won't sour the relationship with a vendor. After all, the consultant walks away after a few weeks, but the client and the vendor will be joined at the hip for years. But Redpath sees no cause for concern. "The vendors will still call to thank you for the business, and you can position your consultant as the heavy rather than play that part yourself."
Winsett doesn't regard his company as a heavy — in fact, he says NPI doesn't even refer to its service as "negotiation," since that term, in his view, "suggests rape, pillage, and plunder." And while both Dupzyk of SCS and Winsett allude to some hard times, both companies appear to be doing well. NPI recently celebrated its 100th client, and counts such companies as Marriott, Lands' End, and Atlas Van Lines among its clients. SCS is growing and may soon expand into telecom contract analysis, perhaps with a partner.
Real growth, these companies say, will come when a C-level executive starts asking hard questions about the way in which IT deals get done — and assures certain people that there's no shame in bringing in hired guns. "In a perfect world," says Dupzyk, "procurement staff would just want to save the shareholders money." But IT is not, as he would be the first to tell you, a perfect world.
Scott Leibs is a senior editor at CFO.
|Heads I Win, Tails You Lose
A quick look at the buyer vs. seller dynamic.
|Sellers' Advantages||Buyers' Disadvantages|
|They don't provide market visibility on pricing data.||Typical buying process entails spending 90 percent of time on product/service selection, leaving only 10 percent of time to be focused on pricing and terms.|
|They don't reveal full range of pricing flexibility.||Can't keep up with ever-changing pricing and terms from manufacturers/resellers.|
|Published list prices often have little to do with actual selling prices.||May make IT purchases in any given category only sporadically, while vendors in those categories have vast experience in cutting favorable deals.|
|Products are often complex and highly customized, resulting in highly variable pricing.||High cost of switching from one vendor to another tends to lock in customers, making them feel they have few options.|