Let the Seller Beware: How to Get Better Deals from Software Vendors

by Ted Yarnell
Reprinted from Wall Street & Technology, January 21, 2003

Chances are you've spent tens of thousands (or even hundreds of thousands) of dollars more than you've needed to for enterprise software. I know this because I have spent nearly 30 years selling enterprise software to corporations, institutions, and government agencies.

I, like many of my peers in this profession, have learned and refined many techniques to get as much of your money as possible. And we, the software industry, have become exceedingly good at it. Very few buyers of enterprise software and related services are as expert at buying as most vendors are at selling.

Like the prosecutor who becomes a defense attorney, I have switched my allegiance, and am now assisting enterprise-software buyers in structuring the best deals and terms with their software vendors. Let me share some "insider tips" that can help you when dealing with technology purveyors.

Cost of Goods Sold
Unlike with hardware or a defined service, software costs are somewhat vague. Yes, vendors will rightfully tell you that their operating margins are low (negative in many cases these days), but, in a given transaction, the cost of doing business is generally limited to the sales costs, delivery (installation and training) costs, and usually minor costs for production of the distribution media. This means that you may have more leverage in a software transaction than for a comparable hardware or professional-services transaction.

Know the Vendor and Its Needs
Public companies have different needs than earlier-stage private companies. A public company may need to achieve its revenue forecast for a quarter, while a private company may be more concerned with securing you as a referenceable customer. Ask the salesperson, "What is important to your company?" If the company is public, check its financials. When are the ends of its fiscal periods? Does the vendor have a healthy customer base? Is there value to the vendor to have an additional customer testimonial posted on its Web site? The answers to these and other questions will give you important insights into how best to structure a healthy "give-and-take" negotiation.

Software vendors have suffered from the "hockey stick" revenue dilemma since the beginning of time. Revenue tends to be back loaded for any quarter, and, in many cases, for their fiscal year. This is a high-risk situation for the vendor, but one which creates two distinct negotiating opportunities for you.

First, in their attempt to normalize revenue for a period, a vendor may be more inclined to cut a deal early in a quarter (before the end of the first month of the fiscal quarter) or early in a year (by the end of the first quarter of their year).

Second, vendors may become "desperate" by the last days of a quarter, or the year, to close business. You need to carefully examine the situation of each vendor to create and execute the optimal strategy here. Let me give you an example.

When I was employed as vice president of sales for a pre-IPO, venture-backed software company, we had a deal on the table with a major financial institution. The original value of the deal (after discounting) was about $250,000. The customer acknowledged his need and desire for the product, yet stalled for no apparent reason in completing the transaction.

At the time, my company was seeking a secondary round of venture funding, and valuation was our critical need. More important than revenue to us was the ability to reference this customer, which would have a very significant effect on valuation. This customer did his homework, and crafted a strategy to exploit our need at the time: A week before the end of the quarter, I was invited in to meet the senior executive who bluntly informed me that they would conclude the transaction within three days, and would be willing to serve as an excellent reference to prospective customers and investors, but only if we agreed to do the transaction for $100,000.

The customer got the price he wanted, and my company secured the customer as a critical reference.

Leverage Competition
The biggest mistake any buyer can make in a negotiation is to reveal that a vendor does not have competition. Even if you have selected a vendor that is unique in its ability to solve your problem, you should not reveal this to the vendor until after a deal is done.

The fear of competition will always give you an upper hand in a negotiation. You should endeavor to understand your preferred vendor's competition, and regularly ask your vendor competitive questions.

A good source of questions is to request a "feature comparison" from your vendor's competitors. Some vendors will be reluctant to give this to you, but if you are successful in securing this document, excerpting certain competitive "weaknesses" and posing them to your vendor will make them far more malleable during a negotiation.

I had a very interesting experience some years ago that exemplifies this. At the time I was a sales manager for a software company and we were proposing the biggest deal in the company's history (at that time) to another major financial institution. The deal had a value of about $3 million and this customer was careful to make us understand that we were competing with another vendor.

During the evaluation and selection process, the customer "played poker" very well, and never gave us any indication that we were the favored vendor, despite our continuous attempts to achieve that acknowledgement.

I had met with the buyer on a Friday, and he stated that we "needed to sharpen our pencil," that our price was "significantly higher" than our competition's, and that unless we "got aggressive," we would lose the deal. He advised me that a decision would be made the following week.That afternoon I conferred with my CEO and was given authorization to lower the price by whatever I needed to in order to secure the business. A price reduction of more than $1 million was anticipated. That weekend, I was reviewing the help wanted ads in the New York Times and discovered that the customer had taken a full-page ad seeking technical people with expertise in my company's product.

That advertisement was very expensive for the customer; it signaled that my company was indeed the favored vendor. I stood firm on the price and we closed on the deal the following week, as originally proposed. The moral of the story: don't tip your hand.

Use the Weight of Your Organization
While working for the previously cited software vendor, my sales team was proposing a transaction with the New York headquarters of a very large global financial institution. The deal had a value of several million dollars and provided software for the customer's operations in New York, London, Tokyo and Singapore.

Representatives in all geographies would share in the value of the transaction, however, the sales team responsible for taking the order would receive a proportionately larger share. My New York team forecasted the deal to come down on a certain date.

The customer invited us in to advise us that our unit in the United Kingdom was proposing a better deal for the same purchase. This evolved to include proposals from our Tokyo subsidiary, as well as our agent in Singapore. The customer had effectively created competition within my company to secure the most favorable terms. In the end, the deal closed, albeit at a lower price than originally proposed, and we, as a vendor, refined our policies to avoid similar situations.

Whenever possible, create competition within the vendor organization. While many larger vendor organizations have processes in place to avoid this technique, a buyer is well positioned to leverage its power when doing global deals.

Other things to consider:

Understand the revenue model of software and services vendors.
Get the pro-forma licensing agreements concluded early, then focus on the business terms and conditions.
Have the vendor propose an ROI analysis, then use it to your advantage.
Don't overpay for maintenance agreements and maximize your service levels. Also consider re-negotiation of existing service agreements.
Go into every negotiation with a plan (strategy), and execute precisely.

ABOUT THE AUTHOR: Yarnell is a software industry veteran. As the founder of T. Yarnell & Associates, he is leveraging his knowledge of technology selling to help software buyers structure optimum deals with vendors.

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