By Mark Suster.
I recently wrote a post about negotiating with suppliers called “The End of the Mexican Road.”
The post talked about how to find the lowest acceptable price & terms in a deal through testing.
In the post I made clear that I believe that all negotiations should seek to find fair deals where both parties can feel good about the outcomes. But that doesn’t mean always just saying “let’s split the terms 50/50 down the middle.” Often that doesn’t make sense.
But what about when you’re negotiating with buyers and not suppliers?
This process is obviously very different as you will likely have much less leverage.
Most people claim to not want to deal with the hassles of negotiating. I think most of us feel this way, really. But it’s not a reality in business. While you may be able to offer a price & terms for your service and not ever negotiate (especially if you’re an Internet company that sells cheaply to small businesses over the web and without onsite support & service) – you’ll still likely have to negotiate on business development deals. So please see this post through that lens – at some point when you deal with larger companies: enterprise buyers, biz dev partners, VCs or one day acquiring companies – you’ll like encounter these negotiation issues.
I could sum up my negotiation mentality as a seller in one phrase that I’ve used as short-hand for my portfolio companies for years, “Everybody wants their pound of flesh.”
It’s short-hand for showing that despite our aversion to the process of negotiations – as buyers we’re conditioned to it and even rewarded for it.
Here’s what a big company negotiation looks like:
1. Your Primary Buyer
You obviously start your process with a primary buyer. This is the person who is sponsoring a deal with your company. You need to know that unless you’re selling into a CEO this person has a cast of characters behind her that need to approve her decision – even if she holds the budget.
And like it or not, one important way that she will be judged by others is her ability to commercially negotiate a deal with you. If she is seen to accept your initial offer on: Price, payment terms, service-level agreements, remedies for service problems, cancelation clauses, indemnities and all of the other terms of a standard agreement then she will be seen as weak.
So whatever terms you offer her, she will likely push back. She’s already built in an assumption that your first offer isn’t likely your best.
Yes, I know it would be much easier and frankly more pleasant to just be able to put in THE offer and say, “I know that most sellers (or biz dev partners) negotiate. We hate playing games so we don’t negotiate. Our offer is our offer.”
Good luck with that.
I swear after all these years I’ve tried just about everything including trying to cut to the chase with the, “no really, this is the deal we want to do” kind of offer.
People are genetically programmed to negotiate anyways.
And they have the incentives to show their colleagues and superiors that they got you to move from your original offer.
Everybody. Wants their pound of flesh. Everybody.
So as distasteful as it might be to you, you’ve got to build in a buffer into your negotiations. You’ve got to have some wiggle room on price and on terms. You’ve got to have both substantive points in which you’re willing to be flexible and also some “throw away” points you really don’t care about but which will become part of your negotiation.
If you don’t, I assure you that you’ll cut into muscle or lose deals for seeming inflexible (rather than the honest, non-gaming-playing executive that you were hoping to be).
2. Your IT Reviewer
So your buyer put you through the ringer to show her independence. She got you to drop price and include more licenses for free. She got you to offer free storage and discounted training. She got you to remove your 6-month cancelation clause (heck, you never really expected 6-months cancelation, did you?).
But now your deal needs to pass through IT. This is the “deal prevention” team in many big corporations. And not that I blame them. They’ve had years of business-unit managers buying software solutions they didn’t need and that eventually become shelfware. Or they have internal tools that they want you to use but you prefer the sexy tools offered on the market.
So IT will both chop your deal off at the knees and if they let you through they’ll extract their pound of flesh. They’ll push you on your uptime SLA, they’ll push for harsher penalties for non-compliance, they demand security reviews … heck – if you’re small enough they’ll push for “source code deposits.” That can be brutal.
If you leave no room for IT negotiations you’ll take an unexpected haircut.
3. Procurement (or Biz Dev Team or M&A Department)
Up until now you’ve done fine. Your business unit buyer isn’t used to negotiating software and if you won over the IT team with your prowess then you’re feeling pretty good.
Now it’s time for the real leg breakers. If you’re selling to small businesses they may not have a procurement team. But all large companies do. And when they get involved all of your non-standard terms go away. You get people who don’t care at all about “relationships” with you. All of your sales training techniques are useless to their procurement Teflon. Procurement departments are professionally aloof from sales processes.
I would have lines like, “if GoToMeetings is willing to sell for price X, why should I pay more for you?”
Me, “well, let’s look at the business case for our software implementation. We believe we’ll be saving you more than $1 million per year for 5 years and this was prepared by your team.”
Their bullshit meters are too finely tuned for that type of negotiation.
“I don’t care about that. I don’t want to pay more for your product than I pay for similar products.”
That’s their job. No procurement professional gets ahead by saying, “hey guys, I read their terms. This deal is actually pretty fair. Let’s just approve it.”
Everybody is judged and promoted based on their ability to extract their pound of flesh. In fact, if your primary buyer doesn’t champion you through procurement you’re pretty much screwed. You have to look for a buyer that knows that procurement will demand unreasonable terms and who wants to work with you badly enough that they’ll push procurement to be fair.
Still, procurement must be fed. They need some wins.
Biv Dev teams? Same. Born to negotiate and trade terms.
M&A? Do they want to tell the CEO that they bought you for your asking price? And no lock-in? No earn outs? No risk to you for non performance? Naw. M&A needs flesh.
4. And so on Down the Line
Your buyer’s boss. Have you ever met a boss who looks at an agreement and simply says, “Yeah, I’m fine with that. Go ahead!” And just wait until the legal department weighs in. You’ll have all sorts of terms added that you’ve never even heard of. Remember that clause about your customer doing a big press announcement about the deal? Not so much. The marketing department will cut that off at the pass. And then, of course, there’s the CEO or SVP if your agreement is large enough or if it’s an M&A transaction. Even the big boss want’s her piece of flesh.
So What do Do About it?
By now it is a small miracle that you still have a deal on the table. If you started the process with your “best & final offer” at this point your deal is probably upside down. As you get through the multiple stage-gates people will demand their toll – whether you have something you feel you can offer or not.
So start with your final position at your own peril. I know your gut would tell you, “Don’t play games! We all hate games!” we tell ourselves. Mine, too. But then there’s reality. The sooner you accept realpolitik the sooner you realize that the incentive structures of dealing with companies, organizations and political structures (not to mention human nature) requires you to play the game. It requires you to start with some fat in your deal.
• Have some room to compromise on pricing. I usually recommend that you even signal to your buyer that there is probably some room there. Why? You don’t want to be knocked out early because your prices are way out of the ballpark. Let them know there’s probably some flexibility. Actually, if you realize their internal incentives you are ironically doing them a favor by having some fat on price.
• Have some terms that you would love to win but aren’t wedded to. Perhaps it’s having your customer pay annually in advance when your goal is really monthly in advance. With your first buyer you might agree quarterly in advance. Somebody later will negotiate you down to monthly. And beyond that to monthly in arrears
• Have some room in the SLA for the IT department, some room on legal terms for the legal department
After all, if everybody wants their pound of flesh, you’re screwed if you start with only muscle.
I know it sucks. The people most averse to this message are often young, idealistic professionals who haven’t yet realized the world works this way. Or hackers who want an ideal world in which you build beautiful software and people just pay what’s fair.
But don’t hang the messenger. I’ve seen this enough first hand to know that … the world just is the way it is. Organizations are not static. They’re filled with people, politics and incentives.