© 2009 Richard Pryor & Associates

Intended Audience – This tip sheet is for the assistance of people involved in the procurement or the supply of ICT products and services.

When should I form my negotiation team?

A negotiation team should be identified at the earliest possible time to ensure that processes are well-planned and executed.

In the case of the customer, the team should be formed (or relevant people at least consulted) before any formal approach to prospective suppliers is made. The level of involvement of different team members will vary at different stages.

In the case of the supplier, it should have one or more “gate keepers” who review business opportunities and sort them into those warranting a response and those where the invitation to submit a proposal should be declined. The team should be identified as soon as a decision is made to respond and the supplier’s bid leader should then determine the extent to which each team member needs to be involved as the process progresses.

Why assemble a team so early?

Although it can often be difficult to get sufficient attention from potential team members at the commencement of a project, the initial steps in the procurement or supply process can have the most significant effect on the negotiated outcome.

For example, a customer must ensure that its RFP sufficiently specifies its functional requirements unless it is prepared to pay for a substantial scoping exercise by the preferred supplier. An inadequate specification of requirements could seriously prejudice the effective evaluation of proposals. A supplier receiving a deficient RFP should have sufficient personnel available to ensure that any errors, omissions or ambiguities in the RFP are identified. These deficiencies would need to be raised with the customer a sufficient time prior to the RFP closing date to enable the customer to respond and the supplier to adjust its proposal to take into account the response. A supplier that is able to show this level of diligence will make a positive impression and gain a head start on other suppliers even before any proposal is submitted.

I am undertaking a major procurement. Who should be on my negotiating team?

The customer team required for a major procurement will typically include some or all of the following members, each of whom may have a different level of involvement in the procurement process:

• Senior management sponsor – Preferably this person will be at CEO or board level. Such a person will not have time to attend and participate in all processes but if a project will depend on senior management approval, then early involvement and regular updating of this representative will ensure that potential obstacles to approval are flushed out early (e.g. a project may never be approved because of budget constraints, higher priorities or because the sale of relevant business divisions is under consideration). This person will ideally become a champion of the project and support the board level or senior management approvals required for the project.
•  Procurement Manager – Often the CIO or IT Manager of the customer. As the prime mover for the project, this person will need to serve as the hub of the team. This person will be the decision maker and will determine the extent of involvement of each other team member. The commitment required and the impact the project will have on the time available to undertake regular “business-as-usual” tasks should not be under-estimated. The Procurement Manager should consider their own strengths and weaknesses. A Procurement Manager who has been involved with the same organisation for a long time may know the business very well but may not have been involved in a major procurement for quite a long time and may have only been involved in a very limited number of major procurements. A relatively new Procurement Manager from outside the organisation may have had more recent experience with a major procurement but may not have sufficient knowledge of the customer organisation and may face greater challenges in winning business and user support for any change.
• Negotiation session chairperson – This may be the Procurement Manager. However, it is often an advantage to have an experienced chairperson fill this role. The external ICT consultant or legal adviser may be suited to fill this role. The chairperson’s role is usually to preside over the negotiation sessions, ensure agenda items are addressed, manage time spent on each topic and keep parties on topic. The chairperson may suggest breaks or adjournments when appropriate.
• ICT technical support – These representatives (possibly in conjunction with external experts) will provide the skills necessary to identify and document technical requirements, to evaluate proposed solutions and to undertake reference checking by communicating with their peers at other customer sites. The likely impact of the project on current work-loads should be assessed and in some cases additional temporary staff or re-allocation of responsibilities may be required.
• External ICT consultants – It is often desirable to include one or more consultants who have had experience with similar procurements to provide information and advice to the Procurement Manager and to supplement for any lack of internal technical resources.
• Key business unit representatives – These representatives will ensure that the acquisition will meet functional and other business requirements and they will provide input in relation to potential changes in the business which may need to be accommodated. Determining who to involve (and who not to involve) can be a very delicate exercise. Too many representatives in this area can result in the waste of much time dealing with issues which are minor from a project perspective but which are considered significant (rightly or wrongly) by a particular business representative. If too few business representatives are involved, then the project may succeed in theory but fail because the business unit users reject it.
• Project Manager – It is desirable to involve the person who will be responsible for the delivery of the project in the development, negotiation and agreement of the processes and contract mechanisms which will apply during the project.
• Negotiation Administrative Support – This person is often the administrative assistant of the Procurement Manager. They provide administrative support to the team and help manage the potentially large amounts of material received from prospective suppliers. Once negotiations start, they assist with the preparation and circulation of agendas and minutes.
• Finance representative – This person may be required to assist with analysis of pricing options and to ensure that transaction structure is suitable from a tax and balance sheet perspective.
• External accountant – This person may be required to assist with specific tax issues.
• Internal and external legal advisers – Internal legal advisers typically do not have much experience with respect to ICT procurements but they are very conversant with corporate policies and can specify the preferred approach to boilerplate provisions in the agreement. An external legal adviser should be selected who has extensive experience with respect to ICT procurements. Ideally the external lawyer will be given a sound understanding of the proposed scope of the project to ensure that scope requirements are clearly specified in the final agreement. One or both of these legal advisers should be involved in the preparation of the documentation used to approach the market (Request for proposal, tender etc). Consideration should be given to incorporating a form of contract or at least a listing of key contractual requirements in the RFP or tender documents. This will allow evaluation of how difficult it may be to conclude a contract with the otherwise preferred supplier.
• Risk adviser – This person may be involved in the analysis of risks, assessment of the adequacy of the supplier’s insurance and the review of the customer’s own insurance cover.
• Probity officer – A person involved to ensure that proper probity principles are applied to the procurement process.

Who does the Supplier usually have on its team for a major supply contract?

The team required by the supplier to address a tender or RFP will typically include some or all of the following members, each of whom may have a different level of involvement in the procurement process:

• Senior management (relationship) – The supplier will typically involve several of its most senior personnel at key points of the process. Typically, senior management play no role in dealing with detail although they may sometimes participate to make final concessions if there is a deadlock in contract negotiations.
• Senior management (bid approvals) – The supplier will often require bids to be reviewed at senior management level with particular attention to project risk, strategic significance of the customer or area of work and profit margin. The customer will not normally have any exposure to this process or these people.
• Bid Manager – The person with overall responsibility for the supplier’s bid response and dealings with the customer. This person may be a member of the sales team but typically will have sufficient project management skills to manage the required inputs from various other team members.
• Sales and relationship managers – One or more of these people may have an existing relationship with the customer. One of these people may be the Bid Manager. These people are most likely to have face to face dealings with the customer.
• Solution experts – These are the people that will evaluate the extent to which the supplier can comply with the requirements of the customer and the additional services/products which will be required to bridge any gaps.
• Finance and accounting – These people will determine pricing of the proposal based on costs, margin and appropriate contingencies. They will assist with re-pricing as required during contract negotiations;
• Contract/legal – This person will initially be involved in reviewing any contractual or other legal requirements of the RFP or tender and will prepare any required compliance table or other contract response. Often this person will be a trained internal resource (with no legal qualifications) but an internal lawyer or an external lawyer with knowledge of the supplier’s policies on contractual provisions and other legal issues may be used. If selected as preferred supplier, a more senior internal legal resource or external legal resource may become involved in contract negotiations.
• Insurance – this person may be involved to assess compliance with any insurance requirements identified by the customer. For unusual projects, they may also be involved in assessing the adequacy of the supplier’s insurance cover irrespective of customer requirements.

What if my project budget won’t allow such an extensive team?

For lower budget or lower risk projects, a full team of the type described is not essential. The entire project could be undertaken by a single person (e.g. the Procurement Manager on the customer side) with appropriate consultation with some of the identified categories of team member when required.

It is recommended that key resources should be consulted at the very beginning of the project. As a bare minimum, business, technical and legal input should be sought before the issue of any tender or request for proposal, during the evaluation of responses and in the negotiation of the formal agreement. The proposed project manager should be involved in the review of the proposed project plan and contract processes before contract execution.

How do I avoid management by committee?

They say a camel is a horse designed by a committee. This is too complimentary of some committees and a bit harsh on the ship of the desert.

The project team should not form a committee. A clear leader is essential and decisions should not be made by the team as a whole or by a majority of team members. The contributions of various team members should be treated as nothing more than that. One person (typically the Procurement Manager of the customer and the supplier’s Bid Manager) should have overall control of the process for the supplier or customer and should make the necessary decisions after appropriate consultation with members of the team.

It is not unusual for a major customer procurement to be subject to oversight by a Steering Committee. This is quite acceptable although it is preferable that the Steering Committee focuses on high level issues.

How do I ensure clear communication between team members?

Technobabble and legal jargon make poor bed fellows.

Although it may be considered tedious by some involved, time should be spent at the outset of the project and during the evaluation to confirm that the various members of the team have an adequate understanding of matters outside their own area of expertise.

The legal adviser will need a reasonably detailed understanding of the project in order to adequately identify project risks and issues and to make soundly based recommendations on preferred and alternative approaches to those risks and issues.

One of the most common sources of project disputes is poor scope definition. A legal adviser cannot effectively assist with the precise definition of scope unless he has a very good understanding of the technical side of the project.

The customer’s Procurement Manager and the supplier’s Bid Manager will need a clear explanation of issues and options from the legal and financial advisers to enable soundly based decisions to be made.

It is human nature to resist doing anything that might display “ignorance”. A culture should be established from the outset that encourages team members to seek further clarification whenever anything is not clear. This should be reinforced regularly by the team leader.

For highly technical projects, it may be desirable to provide team members with a glossary of the many acronyms and technical terms which may be used during the process.

How do I control communication between my team and the other party?

Rules of engagement should be established at the outset which stipulate that all communications between the parties must be channeled through a nominated representative of each party.

At times, it may be appropriate for communication to take place directly between specialist team members. However, any departure from the standard communication protocol should be forbidden unless both the nominated representatives have approved the alternative channel of communication.

© 2009 Richard Pryor & Associates – The content of this tip sheet is subject to copyright and may not be translated, adapted, reproduced, broadcast or transmitted in whole or part without the express written permission of the author.

Important disclaimer – This tip sheet provides general comment. It does not constitute advice on any matter. No reader should act on the basis of any content without obtaining and considering professional advice upon their own circumstances. Richard Pryor & Associates and its officers and agents hereby disclaim any liability to any person with respect to the consequences of anything done or omitted to be done in reliance upon any of the content.

For further advice on ICT procurement and supply negotiations, contact Richard Pryor – richard@pryor.com.au

Intended Audience – This tip sheet is for the assistance of people involved in the procurement or the supply of ICT products and services.

When should a customer document its functional requirements?

Ideally, the customer will be able to document its functional requirements with a high level of detail before seeking proposals or tenders.

Even if technical requirements cannot be fully specified until after proposals have been evaluated it is highly desirable that the business requirements (including any new or revised requirements) are documented and signed-off by the relevant business unit managers before an approach is made to the market.

What if the customer has insufficient resources to document its requirements?

A major acquisition creates many additional demands upon the time of a customer’s ICT department. The relevant resources may already be overstretched just managing day-to-day operations. The additional resource demands associated with the preparation of detailed requirements may force the customer to engage one or more consultants to assist in the analysis and documentation of requirements.

If this is necessary, then the consultants should be selected on the basis that (a) they are unlikely to be a bidder for the relevant business; and (b) they are likely to be able to assist and add value to the subsequent phases of the procurement process.

A formal services agreement should be entered into with any consultants engaged for this purpose. Such an agreement should define the scope of work, required deliverables, time-frame for completion, fees and payment terms. In addition it should address issues of confidentiality and the ownership of intellectual property rights in the deliverables.

Should the documentation of requirements be entrusted to the supplier?

After selection of a preferred supplier, it is common for the customer’s requirements to be further developed by the preferred supplier or with the assistance of the preferred supplier. This raises a range of additional issues which need to be carefully managed. In particular it can create a situation where the customer loses most of its negotiating power.

The management of this process needs to be considered in the context of the specific procurement. However, the following issues should be considered if the supplier is to be involved in the refinement of the customer’s requirements.

• Has the supplier agreed to all key contractual terms? – It is desirable that the terms of contract have been agreed before the supplier commences any substantive work on the development or refinement of the documentation of the customer’s requirements. This can be achieved using a master services agreement with a statement of work to govern the initial work on requirements.
• What level of certainty is there regarding future pricing? – If the supplier is unable to give firm pricing for the overall project until the completion of the detailed analysis and documentation of customer requirements, then one of the deliverables required of the supplier should be a firm price for the further phase(s) of the project. The basis upon which the firm price will be generated should be agreed before the commencement of any work. The customer should have a right not to proceed if the price proposed is unacceptable.
• Will the customer be entitled to use the detailed requirements document in any event? – If the supplier completes a detailed requirements document which is considered satisfactory but the customer elects not to proceed with that supplier (eg. because pricing for the further phase(s) of the project is too high), then the customer should be entitled to use the detailed requirements document for its own purposes including disclosure to an alternative supplier. It should be noted that this option is not always workable because the development of the detailed requirements document will often be very specifically framed by reference to the products offered by the supplier engaged to prepare the detailed document.
• What warranties will the supplier give with respect to its input to the development of requirements? – It is common for a supplier to seek to exclude liability for any loss suffered by the customer if it is unable to achieve its business objectives. However, if the supplier is involved in the development of the requirements, it needs to take some responsibility with respect to the quality of its work.

When should a contract be provided by the customer?

For any major procurement, the customer should consider including a full contract with its RFP or tender documents. Prospective suppliers should be required to complete a contract compliance table in which the supplier must identify any clauses which are not accepted and must provide the supplier’s suggested alternative approach to the relevant issue.

For less significant and lower risk procurements, the customer should still consider the critical contract issues and include a list of the key legal and commercial requirements in summary form in its RFP or tender documents. Prospective suppliers should be required to complete a compliance table addressing each of these contractual requirements.

When should a contract be provided by the supplier?

It is usually preferable for suppliers to table contractual material at the earliest possible stage.

For less formal procurements, there are a range of template proposal documents which can be used which highlight the solution offered but also incorporate contractual terms and conditions. Use of a carefully developed proposal template can simplify contract finalisation, reduce the frequency of customer legal reviews and may significantly shorten the sales cycle.

In the case of formal procurements, it is quite common for the customer to use generic procurement documents (eg. a standard RFP document which is used for all procurements of goods or services). These standard procurement documents often contain no specific ICT procurement provisions. As a result, issues like software licensing, support and service levels are not addressed. A supplier can often win respect from the customer by identifying these deficiencies and then proposing the use of its own contract documents.

If the supplier’s contract is particularly one-sided, then the particular circumstances of each procurement should be assessed to determine whether it would be best to disclose this position early in the process (which may strengthen the supplier’s negotiation position if it is selected as preferred supplier notwithstanding the contract terms) or to hold back disclosure of the unfavourable terms until the customer is otherwise committed to proceed with the supplier.

Even where a customer has provided a suitably adapted contract as part of its RFP or tender documents, the supplier may still need to submit contracts for review by the customer. For example, the project may involve the use of third party software or hardware which will be supplied subject to the third party’s terms and conditions governing the licence, warranty and the provision of maintenance.

© 2009 Richard Pryor & Associates – The content of this tip sheet is subject to copyright and may not be translated, adapted, reproduced, broadcast or transmitted in whole or part without the express written permission of the author.

Important disclaimer – This tip sheet provides general comment. It does not constitute advice on any matter. No reader should act on the basis of any content without obtaining and considering professional advice upon their own circumstances. Richard Pryor & Associates and its officers and agents hereby disclaim any liability to any person with respect to the consequences of anything done or omitted to be done in reliance upon any of the content.

For further advice on ICT procurement and supply negotiations, contact Richard Pryor – richard@pryor.com.au

Intended Audience – This tip sheet is for the assistance of people involved in the procurement or the supply of ICT products and services.

What are rules of engagement?

Rules of engagement specify the obligations of the parties with respect to their dealings with each other during the procurement process.

The rules should be worded to ensure that each party clearly understands permitted and forbidden activities.

Rules can vary from a simple statement limiting the lines of communication between the parties to a detailed listing of probity requirements.

Why and when are rules of engagement required?

Rules of engagement are required in all but the most minor procurements to ensure that there are no misunderstandings about what will or may be considered unacceptable behavior by a party. They also serve as a clear guide for communication between the parties to ensure that any significant issues are always brought to the attention of the key representatives of each party. In some circumstances, audit or probity requirements will require that rules of engagement be in place.

It is usual and preferable for rules of engagement to apply from the commencement of the procurement process. If rules of engagement are not introduced until later in the procurement process (e.g. after a preferred supplier has been selected), then it is possible that problem dealings may have already occurred which the rules of engagement cannot retrospectively remedy.

How are rules of engagement typically documented?

Rules of engagement are most commonly incorporated as a section in the RFP or tender documents. For major procurements, the rules of engagement may be dealt with in a separate document (a letter, agreement or deed) which one or both parties must sign.

In either case, a key issue will be whether the rules of engagement become contractually binding and enforceable. Without benefit for both parties, the rules of engagement may not be enforceable. This benefit is typically referred to by lawyers as “consideration”.

Where both parties mutually agree to comply with the rules, then there should be no issue relating to adequacy of consideration.

However, it is not uncommon for the rules of engagement to be prepared by the customer on terms which only impose obligations on the supplier. If the rules of engagement are entirely one-sided, there needs to be some benefit for the supplier in order for the supplier to be bound and potentially liable. Typically, this is achieved by specifying that the supplier benefits by being permitted to participate in the further steps of the procurement process.

What are typical topics for rules of engagement?

There is considerable variance in the approach taken to the rules of engagement. In some cases, the topics included in rules of engagement would more commonly be dealt with in other sections of the RFP or tender materials (e.g. confidentiality obligations).

Some of the rules of engagement topics identified in the following paragraphs are often dealt with in other sections of the RFP or tender documents:

• Single nominated point of contact – Each party should nominate one person to serve as the sole point of contact for any communications between the parties during the procurement process. Communication with other representatives of a party should be forbidden except to the extent that such communication is specifically approved in writing by the nominated representative of that party.
• Clarifications – If a prospective supplier requests clarification or further information, the rules may stipulate that the customer is permitted to provide the clarification or additional information supplied in response to this request to any other prospective suppliers.
• Change in process – The customer usually specifically reserves the right to cancel, suspend or modify the procurement process at any time.
• No obligation until formal contract executed – The rules usually provide that selection of a preferred supplier confers no rights and that there will be no agreement between the parties regarding the procurement until a formal contract is executed.
• Selection of preferred supplier – The rules often provide that the customer need not select the lowest proposal and that the customer may enter into negotiations with one or more of the potential suppliers in its absolute discretion.
• No warranty of accuracy of customer information – The customer usually excludes any warranties and representations regarding the accuracy or completeness of the customer information made available to the supplier during the procurement process and requires that the supplier confirm all required information through its own enquiries. This can be problematic if the only source of critical information is the customer. In such cases, the supplier will need to qualify its RFP/tender response by reference to the assumptions it has made regarding the accuracy of this information.
• Costs – Each party must bear its own costs associated with participation in the procurement process.
• Confidentiality – The parties sometimes agree that all communications and information exchanged relating to the proposed procurement must be kept confidential.
• Use of proposal/tender contents – The customer sometimes requires the prospective supplier to agree that the customer is free to use and disclose the content of the supplier’s proposal. This is often a point of concern for a supplier, as it allows a customer to cherry pick the good ideas of several prospective suppliers and then disclose those ideas to a preferred supplier.
• Media releases – The parties often agree not to make any media release or respond to any media enquiry relating to the procurement without first agreeing the approach and content with the other party.
• Conduct of negotiations – The rules of engagement may include provisions relating to the conduct of negotiations. These rules may stipulate where negotiation meetings will be held, who may attend the meetings and who will be responsible for production and issue of the agenda and minutes.
• No socialising – The rules may provide that representatives and employees of a party must not engage in social activities with the representatives and employees of the other party. Exceptions may apply for particular kinds of function or for functions which have been approved in writing by the nominated representative of each party.
• No gifts – The rules may prohibit a party from offering gifts, hospitality or benefits to the other party’s representatives or employees.

How should I promulgate rules of engagement?

In the case of the customer, it is essential that the rules of engagement are made known to all personnel directly involved in the procurement and also to more senior management who may have no involvement in the process but who need to know that they should not engage in any discussions with a prospective supplier about the project.

It is not uncommon for senior management of the customer and the supplier to mix in other business or social contexts and there have been several major procurements which have taken an unexpected and ultimately unsatisfactory direction as a result of discussions between senior executives in other forums. Senior management should be encouraged not to participate in any discussion and should be asked to immediately notify the customer’s nominated contact person if they receive any communication from a prospective supplier.

Suppliers are usually more familiar with the management of rules of engagement but should also ensure that all personnel involved in the procurement are made aware of the rules of engagement.

A particular risk exists that the supplier’s technical personnel will be tempted to make direct contact with the customer’s technical counterpart to discuss an issue. Sometimes this is the most logical way for an issue to be addressed, but direct communication should not occur unless it has been approved by the nominated representatives of both the supplier and customer. Any such communication should be limited to the specific technical issues which require discussion.

© 2009 Richard Pryor & Associates – The content of this tip sheet is subject to copyright and may not be translated, adapted, reproduced, broadcast or transmitted in whole or part without the express written permission of the author.

Important disclaimer – This tip sheet provides general comment. It does not constitute advice on any matter. No reader should act on the basis of any content without obtaining and considering professional advice upon their own circumstances. Richard Pryor & Associates and its officers and agents hereby disclaim any liability to any person with respect to the consequences of anything done or omitted to be done in reliance upon any of the content.

For further advice on ICT procurement and supply negotiations, contact Richard Pryor – richard@pryor.com.au

Intended Audience – This tip sheet is for the assistance of people involved in the procurement or the supply of ICT products and services.

What are hot buttons?

Hot buttons are issues or aspects of a transaction that are considered particularly important by the supplier, the customer or both parties negotiating an agreement.

Individual representatives of the negotiation team of a supplier or customer may have their own specific hot buttons.

A customer’s team may include (i) a financial controller whose hot buttons are likely to include costs and compliance with budgetary constraints; (ii) a business representative whose hot buttons are likely to include the timeline for delivery, functionality and business continuity; (iii) a technical person whose hot buttons are likely to include the “sexiness” or technical elegance of the proposed solution; and (iv) a service delivery person whose hot buttons are likely to include levels of support and service levels after go-live.

A supplier’s team may include (i) a sales person whose hot buttons will include closing the deal as soon as possible in order to earn commission; (ii) a service delivery person whose hot buttons are likely to include time and functionality risks associated with delivery; and (iii) a contract/legal person whose hot buttons are likely to include risk allocation issues and topics where the supplier has relatively inflexible corporate policies.

Why are hot buttons significant?

Frequently a hot button is not a critical element of a transaction when considered objectively. However, the perception of the party or one of its representatives regarding that hot button means that it assumes greater importance than may be appropriate.

If the hot buttons of the other party or individual representatives of the other party’s negotiating team can be identified, this will then enable a negotiating strategy to be put in place which takes advantage of those hot buttons.

A party possessing knowledge of the other party’s hot buttons can potentially use this knowledge to extract greater benefits for itself with respect to other aspects of the transaction.

Example of hot button – Deadlines

One of the most common hot buttons is time.

A customer is often under time pressure to complete an acquisition. This pressure can arise for all sorts of reasons including (a) the limited time until a legacy system ceases to be supported by a third party supplier; (b) a requirements that expenditure be made in the current financial year; or (c) a requirement from the board of the customer that new business functionality be available by a stipulated date.

A supplier is often under time pressure to conclude an agreement in order to meet its sales budget targets. The time pressure applying in these circumstances increases significantly as the end of a budget reporting period approaches.

If a deadline hot button becomes known to the other party, this can be exploited in negotiations to maximise the concessions made by the other party on price and other elements of the transaction in exchange for a commitment to meet the deadline.

Example of hot button – Price structure

A major ICT procurement transaction is usually capable of being priced in a wide range of ways.

Pricing can be structured to minimise capital costs and can be structured to spread costs over a number of financial years or other reporting periods. The pricing structure is often a hot button for both parties.

The customer’s financial representative may be concerned to keep the acquisition off the balance sheet or to spread the expense across several financial years.

The CIO of the customer may be concerned to ensure that there is minimal front-ending of payments to the supplier and retention of a proportion of the contract price which is sufficient to ensure any system defects are dealt with promptly by the supplier during the warranty period.

The supplier may wish to ensure that pricing is structured in such a way that it is able to satisfy applicable laws and regulations relating to revenue recognition and recognise the full value of the contract at the time it is executed.

If a pricing structure hot button becomes known to the other party, this can be exploited in negotiations to maximise the concessions made by the other party on total price and other elements of the transaction in exchange for agreement on the pricing structure.

How do I limit my exposure to the impact of hot buttons?

A party should not disclose its hot buttons to the other party and should not place obvious emphasis on any particular requirement during negotiations (except as part of a structured negotiation plan).

If members of the negotiation team have hot buttons or strong views about any particular issue, they should be counseled to avoid exposing this to the other party.

If a hot button like time pressure exists, then consideration should be given to whether alternatives exist to remove that time pressure or other hot button (e.g. reporting to the board so that the board relaxes a firm time requirement to ensure that the transaction proceeds on the best possible terms).

The negotiating team should be comprised of a range of people who will bring different perspectives to the negotiations and these other members should provide checks and balances with respect to the “fairness” of proposed concessions to be made in exchange for the satisfaction of one team member’s hot button requirements.

The planning and implementation of a structured negotiation process by a party reduces the risk that hot buttons can be exploited by the other party.

© 2010 Richard Pryor & Associates – The content of this tip sheet is subject to copyright and may not be translated, adapted, reproduced, broadcast or transmitted in whole or part without the express written permission of the author.

Important disclaimer – This tip sheet provides general comment. It does not constitute advice on any matter. No reader should act on the basis of any content without obtaining and considering professional advice upon their own circumstances. Richard Pryor & Associates and its officers and agents hereby disclaim any liability to any person with respect to the consequences of anything done or omitted to be done in reliance upon any of the content.

For further advice on ICT procurement and supply negotiations, contact Richard Pryor – richard@pryor.com.au

© 2010 Richard Pryor & Associates

Intended Audience – This tip sheet is for the assistance of people involved in the procurement or the supply of ICT products and services.

What is salami slicing?

Imagine you hold a stick of salami. From time to time I take a slice of your stick. Each salami slice may be quite thin and you are happy to give it. However, after a period of time you look down and see that you no longer hold a stick of salami but only hold a stump.

In the context of negotiations, salami slicing involves a process of dealing with issues one at a time. If a party effectively undertakes a salami slicing process, it can result in a significantly more favourable agreement than if all issues are tabled from the outset. Conversely, a party that allows the salami slicing process to be imposed on it may fail to achieve a deal much better than the salami stump.

Why should I consider using a salami slicing approach?

• Control of negotiations – If a process is adopted that controls the sequence of discussion of issues, this gives the party with control of the issues considerable control over the entire negotiation process.
• Pressure on other party – The salami slicing process places pressure on the other party and puts it off balance in the negotiations. This can be exploited, particularly when the approach is used by a customer in a competitive procurement and the preferred supplier is under constant threat that the customer will revert to negotiations with an alternative supplier.
• Adding issues – If a party has not disclosed its full list of issues, then it is in a position to add new issues at any stage without disclosing to the other party that the issue is new.
• Freedom to reverse or modify position – As the discussion of selective issues progresses, it may become apparent to the party controlling the salami slicing that it should reverse or change its position on an issue which has not been disclosed to the other party. The other party will have no awareness of a change in an undisclosed position. Where the full list of issues is tabled at the outset, a change in position can generate protests and create difficulties.
• Increased prospects of a better outcome on each issue – Where an issue is discussed in isolation a better outcome may be achieved than if an issue is considered with a full awareness of the position which will be taken by the salami slicing party on other related issues.

How is a salami slicing process adopted?

• Control of process from outset – In order to apply the salami slicing process, the party wishing to do so will need to be in a position to control the process from the outset. Generally customers conducting an attractive and competitive procurement process are in the best position to take control of the process.
• Issues to be dealt with one at a time – The party adopting the salami slicing process should stipulate the rules which will govern the process including requirements that (a) the issues will be dealt with one at a time; (b) that party will provide the agenda for the issue or issues to be discussed at each negotiation session; (c ) the parties will strive to reach agreement on each issue; (d) each party must be represented at the negotiation session by someone with authority to make all necessary decisions to close the issue; (e) the meeting will be adjourned if agreement cannot be reached; (f) the party may withdraw from negotiations and (in the case of a customer) commence negotiations with an alternative supplier if an issue is not satisfactorily resolved.
• Mix of issues – Issues should not be raised in order of importance or in any other obvious order. Issues should be sequenced so that no clear pattern emerges.

Should I always try to adopt a salami slicing process?

There are many circumstances where a salami slicing process should not be adopted. These include the following situations:

• Lack of negotiating power – If a party is unlikely to have sufficient negotiating leverage to take control of the process, then an attempt to salami slice will probably fail. For example, if there is only one potential supplier of a solution then the customer will have insufficient leverage to impose a salami slicing process on the other party.
• Risk of antagonising the other party – The intent of a party in adopting an obvious salami slicing approach can be very transparent. Adoption of the process or an attempt to adopt the process can result in an adverse reaction by the other party which may prejudice the entire process. This is particularly the case when the A List, B List permutation of the salami slice is attempted (see below).
• Complexity of interrelationships between issues – If the issues are complex and interrelated, it may be dangerous for a party to try to resolve each issue in isolation rather than dealing with the issues collectively.
• Inability to plan and manage process – The planning and management of a salami slicing process requires careful planning and management. If the required rigour cannot be applied and maintained throughout the process, then it may be unwise to apply a salami slicing approach.

Are there variations on the basic salami slicing approach?

• The A list and then the B list – The most common alternative version of the basic salami slicing approach is an approach where a party tables an initial list of issues (the “A List”). Both parties then proceed to negotiate on the terms of the A List as if it is a complete list of issues. The other party makes concessions on the basis that it understands the complete situation. Following discussion and resolution of all or most of the issues identified in the A List, the party then produces a second list of issues (the “B List”).

  The B List or any further list of issues is often presented with an excuse or explanation. The most common excuse is based on the requirements of someone else within the organisation. The requirements might be attributed to a legal review, board or Cabinet review.

  The introduction of a B List will usually cause annoyance and may result in protests, withdrawal of concessions or suspension of negotiations.

• Tabling contract documents at a late stage – A party may table contract terms and conditions at an advanced point in the negotiations which are inconsistent with the terms apparently agreed during discussions. The party tabling the agreement may present it on the basis that it is a standard document and it cannot be varied.

  This situation often arises where a prime contractor is negotiating terms with a customer but the transaction also involves critical third parties. For example, the prime contractor may be the implementation services provider and one or more software licensors may be key third parties. The software licence agreements may contain provisions which undermine the effect of provisions which have been agreed between the customer and the prime contractor.

How do I resist a salami slicing approach?

The application of the salami slicing process can cause delays in a procurement process or even force a party to abandon the process with a particular supplier and restart the procurement process with an alternative supplier.

In order to avoid or minimise the risks associated with the salami slicing process, the other party should be asked to provide a written list of all issues and to confirm in writing that the list is a complete list of all issues arising under the agreement.

In parallel with this, the other party should be required to confirm in writing that it will have obtained all necessary internal approvals relating to negotiations and any agreement which may be reached between the parties during the negotiations.

Similarly, the other party should also be asked to confirm in writing that it will ensure that it is represented at negotiation sessions by a person who has authority to commit that party to any matters that are agreed during the negotiations.

If a party is unable to provide the list of issues and these assurances prior to commencement of negotiations, consideration should be given to deferring the negotiations until these requirements are satisfied.

© 2010 Richard Pryor & Associates – The content of this tip sheet is subject to copyright and may not be translated, adapted, reproduced, broadcast or transmitted in whole or part without the express written permission of the author.

Important disclaimer – This tip sheet provides general comment. It does not constitute advice on any matter. No reader should act on the basis of any content without obtaining and considering professional advice upon their own circumstances. Richard Pryor & Associates and its officers and agents hereby disclaim any liability to any person with respect to the consequences of anything done or omitted to be done in reliance upon any of the content.

For further advice on ICT procurement and supply negotiations, contact Richard Pryor – richard@pryor.com.au

Intended Audience – This tip sheet is for the assistance of people involved in the procurement or the supply of ICT products and services.

Introduction

The topic of negotiation tactics could fill a book. This tip sheet provides an overview of some commonly used negotiation tactics. Typically these tactics are used at various stages in a negotiation and they may be used in combination.

It is desirable that the leader of the negotiation team have a clear plan of how these tactics are to be used and that he or she also has the ability to modify or adopt new tactics as the negotiations progress.

Where the relationship between the parties is strained or ongoing negotiations are in jeopardy, tactics should be selected and applied with extreme caution. The inappropriate or transparent use of tactics can be enough to destroy a potential relationship.

The tactics used by the other party should also be monitored and counter-measures applied as appropriate.

Should I try to control the negotiation process?

A party can gain considerable advantage by taking control of the negotiation process. A key way to take control of the process is to take control of the agenda and minutes of meetings. The content of the agenda can then be used to control all subsequent steps in the negotiation process.

If the agenda is used to control the sequence of discussion of issues, this gives that party an opportunity to engage in salami slicing (see previous tip sheet).

During the planning of the negotiation process, it should become evident whether advantages might be gained if issues are approached in a particular order. The overall negotiation strategy should include identification of methods to capitalise on any advantages which may flow from discussing issues in a particular sequence.

Should I take control of the negotiating environment?

Control of the negotiating environment can provide significant advantages.

There are a large number of environmental factors which can be applied to the conduct of negotiations. Care should be taken in deciding whether or not to adopt environmental tactics as it can be very obvious that these tactics have been employed. Use of these tactics can be seen as disrespectful and can have a significant and negative effect on the progress of negotiations.

Examples of environmental factors include the following:

• Location – Generally it will be an advantage to conduct negotiations on home turf with the comfort that comes from familiar surroundings. Conducting negotiations at your own premises will maximise the opportunities to exploit other environmental factors. There can be disadvantages in negotiating from your own location. In particular, there is greater potential for interruptions or for key team members to be distracted by other pressing matters. It may be more difficult to rely on a lack of authority to agree a particular concession if you are negotiating in your head office with the CEO in a nearby office.
• Meeting facilities – Control over the negotiation location gives control over the primary meeting room and over break-out rooms. This allows the primary meeting room to be set up before the arrival of the other negotiation team so that environmental advantages are maximized. For example, the visitors could be required to sit on the side of a table which faces into glaring windows or which provides a distracting view. Table shapes and seating positions should also be considered. Generally formal seating arrangements are preferable to round table or informal arrangements. It can be very intimidating for the team members of the other party to be forced to sit apart, or in close proximity to opposition team members or in a position where they have insufficient desk space and elbow room. Ideally temperatures should be kept a bit too cool to prevent sleepiness. However, the visitor’s break-out room might be kept at a warmer temperature to impact the effectiveness of work during break-outs.
• Fatigue – If the visiting negotiation team have travelled from interstate, they may not be well-rested when they arrive at the meeting and they will suffer from fatigue and loss of concentration during protracted negotiations. Sessions and topics can be planned to capitalise on this. The host team can conduct the negotiations in such a way that the host team are able to rest during break-out sessions whilst the visiting team is required to work on an issue during the break-out period (e.g. the host team members may be able to rest and eat a meal while the visiting team is working on an issue such as re-pricing for an alternative service). During extended negotiations, this can have a compounding effect and weaken the effectiveness of the visiting team members.
• Time – Team member who travel from interstate may have flight commitments which set a firm closing time for a negotiation session or which create the unattractive prospect of having to arrange overnight accommodation if the negotiations are not finalised. This can allow the host negotiation team to deal with issues so that the time pressure is working against the visiting team towards the end of the day. By selectively parking more difficult issues, the host team may be able to orchestrate a position where the horse trading at the end of the day produces an optimal outcome for the host negotiating team.
• Food & drink – Failure to provide food and drink at appropriate points in the process can be considered bad manners. However, hunger (particularly when combined with fatigue) can reduce the effectiveness of members of a negotiation team. Conversely, an excessively large or rich meal can also result in drowsiness, poor concentration and reduced negotiation effectiveness.

How do I deal with environmental tactics?

Firstly, you need to be aware of the use of environmental tactics. The use of some environmental tactics will be obvious (e.g. forcing you to stare into the glare from a window) but at times the tactics will be very well concealed.

In one transaction, the other party had two teams working on the negotiations. Only one team was involved in face to face meetings while the other team undertook the work which the meeting team would normally have to undertake during adjournments and break-outs. This allowed the dual team to stay ahead on all issues and for the meeting team to take an extended rest while the opposing single team worked through breaks to stay on top of issues.

Stay alert for clues that concealed environmental tactics are being applied.

Once an environmental tactic is identified, it should be nullified as quickly as possible. Glare should be addressed by closing the blinds or changing seating positions. Rest and food breaks should be required when necessary.

Should I revert to informal communications at any stage?

If formal negotiations seem to be stalled or if there is one opposition team member who seems to be obstructing progress beyond a particular deadlock, an informal one-on-one discussion with the appropriate member of the other negotiating team may allow progress to be made.

An informal communication between the parties respective “good guys” can be an effective way to overcome a deadlock following positioning by the parties respective “bad guys”.

This is an ideal tactic to adopt if there has been considerable positioning at the negotiating table and if it would now be difficult for either party to make concessions without losing face.

During the one-on-one discussion, the parties can explore ways to overcome a deadlock and if a suitable compromise can be agreed, the two representatives can then decide how best to give effect to the resolution.

Usually the resolution can simply be communicated back to the rest of the team but in some circumstances it may be necessary to go through the motions of negotiating the resolution.

Should I use surprise?

If the other party to negotiations seems to have excessive control of the process or seems too comfortable in the process, then surprise can be used to put the other party off balance. This can then create uncertainty and a loss of confidence and may lead to a greater willingness to make concessions.

Surprise should only be used when there are clear indications that it might move the other party in the required direction. Storming out of a meeting will significantly weaken a party’s position if they then return to the negotiating table meekly after the other party ignores the tactic.

Specific surprise tactics can include anything unexpected but the following are more common examples:

• Loss of patience or loss of temper – If a representative suddenly raises their voice, slams a hand on the table or otherwise demonstrates impatience or anger, this can unsettle the other side and can send an unstated message about the undesirability of the other party’s position.The danger of this approach is that if the loss of temper is an act, the person purporting to lose their temper needs to be a convincing actor. If the loss of temper is real, then this may create additional issues because a loss of control can result in the inappropriate communication of information which was not to be disclosed (at least at the particular point of the negotiations).
• Change in flavor or approach – If a party changes its general approach to the negotiations, this may not be immediately apparent but it can be very unsettling for the other party. For example, a party may change its approach from a conciliatory attitude where compromise is sought to an inflexible position where no room for compromise is demonstrated.
• Walkout or break-off of negotiations – A sudden walk-out is very dramatic, particularly if it occurs unexpectedly and without explanation. Similarly a sudden suspension of negotiations can be extremely unsettling for the other party.

Should I use a “take it or leave it” approach?

The “take it or leave it” approach has advantages and disadvantages.

The primary advantage of this approach is that it can short-cut debate and force a relatively simple decision on an issue.

If the party receiving a “take it or leave it” ultimatum makes the necessary concessions, then the approach can be used again with respect to other critical issues. The concession may significantly weaken the position of the conceding party with respect to the negotiation of other contentious issues.

If the “take it or leave it” issue is truly a deal breaker, then the early identification that adequate concessions will not be made can save a lot of wasted effort.

The major danger of this tactic arises if the other party elects to “leave it” because this may preclude further negotiations with that party or, at best, the party imposing this ultimatum will be in a much weaker negotiating position.

Should I use a “good guy” and “bad guy” approach?

Nearly every team has members who naturally fall into the good guy and bad guy categories.

Business and technical staff are often the good guys whereas finance and legal representatives are often the bad guys.

Generally I think it better that people perform their role in the negotiating team but act themselves rather than adopt any artificial persona.

In the course of performing these roles, “good guy” and “bad guy” opportunities will often arise. As noted above, an entrenched position established by the bad guys can often be resolved by informal discussion between the good guys.

© 2010 Richard Pryor & Associates – The content of this tip sheet is subject to copyright and may not be translated, adapted, reproduced, broadcast or transmitted in whole or part without the express written permission of the author.

Important disclaimer – This tip sheet provides general comment. It does not constitute advice on any matter. No reader should act on the basis of any content without obtaining and considering professional advice upon their own circumstances. Richard Pryor & Associates and its officers and agents hereby disclaim any liability to any person with respect to the consequences of anything done or omitted to be done in reliance upon any of the content.

For further advice on ICT procurement and supply negotiations, contact Richard Pryor – richard@pryor.com.au

Intended Audience – This tip sheet is for the assistance of people involved in the procurement or the supply of ICT products and services.

What are the most contentious ICT contract issues?

The most common source of problems with respect to ICT contracts is an incomplete or imprecise definition of the scope covered by the agreement. Strangely, scope often receives minimal or inadequate attention during contract negotiations.

The more common contentious issues arising during ICT contract negotiations include price, payment terms, delay and the consequences of delay, intellectual property rights and limitations of liability.

How can I reduce risks relating to scope?

As noted above, scope deficiencies create more ICT contract disputes and difficulties than any other issue. A relatively small investment of time and money should be made at the outset to ensure that both parties have the same intentions with respect to scope. It is too common for the customer to be expecting the equivalent of a Lear jet and for the supplier to be expecting to deliver the equivalent of a bicycle.

In many situations, the full extent of scope cannot be precisely defined until after the preferred supplier is selected. This could be for a range of reasons but is commonly because the exact requirements will depend on which supplier is selected or because the creation of the complete specification of requirements involves a large amount of work which no-one is prepared to undertake on a speculative basis.

In these situations, it is far better for the project to be divided into phases. The first phase should involve the investigation of requirements and the creation of a detailed written definition of scope. This phase must be completed to the satisfaction of both parties before any further phases of the work can proceed. This approach is preferable even if it means that firm pricing cannot be provided until the end of the scoping phase.

What are the most common price and payment issues?

It is critical that there be certainty of price. Fixed price is nearly always preferable to an unknown price based on set rates charged on a time and materials basis. Although a fixed price usually carries a significant loading for unknown contingencies, it is quite common for the supplier to underestimate the effort required and the allowance for contingencies. As a result, a fixed price project will often be substantially cheaper than the same project charged on a time and materials basis.

A supplier will typically be seeking to front-end payments as much as possible to avoid cash-flow problems.

A supplier will also be concerned to ensure that the payment triggers are non-contentious. Suppliers will typically try to agree specific payment dates or other objective payment triggers. They will be reluctant to agree that payments are tied to matters solely within the control of the customer.

Customers will typically seek to tie payments to the value of completed work and will also seek to defer the payment of a proportion of earned value until the end of the warranty period to maintain incentives for the supplier to promptly attend to warranty issues.

Customers will also want to make payments conditional on acceptance by the customer that the work has been satisfactorily completed. This may require satisfactory completion of user acceptance tests as a pre-requisite.

How can I manage delay risks?

Delay needs to be measured by reference to a contractually committed timeline. The contract needs to include a project plan or a mechanism for the development, approval and updating of a project plan.

It is quite common for supplier contracts to contain minimal provisions about the management and consequences of delay. A supplier will seek to minimise its responsibility for the delay it causes and will seek to be compensated for delay caused by the customer or factors beyond the control of the supplier. The supplier will seek to be entitled to an extension of time regardless of the cause of delay.

A customer will seek to make “time of the essence”. This means that a failure to meet a time commitment by the supplier will be a fundamental breach of the contract and will entitle the customer to terminate the contract. The customer may also seek to include liquidated damages for delay. The liquidated damages need to represent a genuine pre-estimate of the losses which will be suffered by the customer as a result of the delay.

The customer will also seek the inclusion of mechanisms relating to delay which will only grant an extension of time for delays caused by the customer. Typically these provisions will require the supplier to notify the customer of any actual or anticipated delay and to take measures to minimise the impact of the delay.

When and why are IP issues important?

It is quite common for intellectual property rights issues to consume a disproportionate amount of negotiating time. Whilst these issues can be critical in some projects, the debates during negotiations often prove to be irrelevant in practice.

A customer rarely needs to own the IP in material provided to it pursuant to an ICT project. If the licence permitting use of the material by the customer (and any associated entities) is broad enough, IP ownership will provide no meaningful additional benefits.

The topic of IP ownership frequently arises where the customer is funding the development of material by the supplier. It is nearly always better for the customer to seek up-front discounts in the price rather than relying on some potential rewards which may flow from the further commercialisation of the product. However, if a share in further commercialisation of the material is important, then this can be agreed without the customer needing to own the IP in the material.

Where the customer insists on ownership of specifically developed material, the supplier usually insists on the exclusion of any pre-existing IP of the customer and of any third party IP which is incorporated in the deliverables. These exclusions can effectively restrict the customer’s ability to make any use of the IP in the specially developed materials.

The customer should retain ownership of its own pre-existing IP and know-how and should retain ownership of its data.

What are the issues associated with limitation of liability provisions?

The limitation and exclusions of liability sought by a supplier typically have the following features:

• An overarching limit on all liabilities arising under the contract (apart from specified exclusions – see below) equal to a specified dollar value or linked to the contract price or a multiple of the contract price.
• The limitation usually does not apply to liability for death, personal injury, damage to tangible property, infringement of third party IP rights, breach of confidentiality obligations, breach of privacy obligations, fraud and deceit. Liability of the supplier with respect to these exclusions is unlimited.
•  An exclusion of liability for loss of data, loss of profit, loss of revenue, loss of anticipated savings, consequential and indirect loss and punitive damages.

A customer will usually accept that some general limitation of liability is appropriate but the amount required will usually be a higher amount than the supplier proposes.

The customer may also require that the exclusions from the liability cap include repudiation of the agreement. Repudiation occurs when the supplier decides that it will no longer perform the contract. The supplier could decide to walk away from the project if the unrecoverable costs to complete the project will exceed the amount of its liability under a capped liability provision. This has actually happened and some customers are keen to avoid this risk by ensuring that repudiation will create an uncapped liability.

The customer should consider carefully whether it is willing to accept an exclusion of liability for loss of profit and consequential losses. In some circumstances, the main losses that a customer will experience as a result of an ICT project failure will be losses of profits.

The supplier typically argues that the customer is in the best position to insure against business interruption and loss of profits.

Am I obliged to act in good faith?

It is generally accepted that in entering into and performing a contract, each party must act in good faith.

This obligation applies in addition to contract provisions and statutory obligations (e.g. the Trade Practices Act prohibition on misleading and deceptive conduct) but it is difficult to define exactly what is required to meet this standard.

Good faith could be defined as “faithfulness to an agreed common purpose and consistency with the justified expectation of the other party.”

The requirement is more commonly defined by identifying conduct which will not meet the standard of good faith e.g. “evasion of the spirit of the deal; lack of diligence and slacking off…abuse of a power to determine compliance; interference with, or failure to co-operate in, the other party’s performance.”

No matter how cunningly a party may have crafted its contract wording, that party will be obliged to act reasonably and honestly.

If a party fails to act in good faith, then it may be liable to the other party for the consequences of its bad faith and it may be precluded from enforcing some or all of its rights under the contract.

© 2010 Richard Pryor & Associates – The content of this tip sheet is subject to copyright and may not be translated, adapted, reproduced, broadcast or transmitted in whole or part without the express written permission of the author.

Important disclaimer – This tip sheet provides general comment. It does not constitute advice on any matter. No reader should act on the basis of any content without obtaining and considering professional advice upon their own circumstances. Richard Pryor & Associates and its officers and agents hereby disclaim any liability to any person with respect to the consequences of anything done or omitted to be done in reliance upon any of the content.

For further advice on ICT procurement and supply negotiations, contact Richard Pryor – richard@pryor.com.au