Don’t Let Procurement Negotiate Enterprise Software Deals – Part 1

As all of us at RSR go through past blog posts and “vintage” research as we prepare to move to our new website, we occasionally come across a piece from years ago that has relevance even today. This is one such piece, from 2011, slightly updated, but still important.

Transactional vs. Relationship-Oriented Agreements

In a 2011 Retail Paradox Weekly blog, partner Paula Rosenblum asked a rhetorical question: “We have heard anecdotal stories of ‘procurement types’ as gatekeepers (to the software acquisition process). It was bad enough when retailers started using ‘procurement types’ to source merchandise, but to select technology? Seriously? Are any of you really doing this?”

Well, apparently the answer is, “Yes we are, seriously”, especially when it comes to enterprise software solutions.

It could be argued, “why not?” After all, isn’t buying a procurement function? What retailers do better than anything else is negotiate aggressively on cost- it’s in the blood. But it isn’t a truckload of merchandise being discussed — it’s software that the business will (hopefully) use for years to come. And although it’s true that today’s commercial software (1) works better than ever before, and (2) has significant functional overlaps between competing products, it’s still not a commodity. No two implementations of anything are ever the same, and software breaks — frequently. So the quality of the people in the organization who both develop and support the software is a really important issue.

In other words, when a company acquires a software solution, it’s not merely acquiring a thing, it’s acquiring a relationship.

On the selling side of the process, software sales people are taught that it’s the relationship that counts. In the 1995 book entitled Solution Selling by Michael T. Bosworth (considered by many in the technology industry to be the bible for effective selling), the author states, “People buy from people. Superior sellers have intuitive relationship building skills; they emphatically listen, they establish sincerity early in the sales call, competent, and trustworthy. The additional factor… is that people buy from people who empower them….” [1]

Some might think that the relationship between a software company and a customer is more akin to a hostage-for-ransom situation. There’s often a serious expectation gap between those who have solutions and those who need them. And that gap isn’t about what retailers need vs. what technology companies have to sell, it’s about the nature of the relationship between the buyers and the sellers.

To get to the bottom of this, we decided to reach out to three sales executives from enterprise software solutions companies. All agreed — in fact were anxious — to talk to us about what they see in the marketplace, what’s wrong with the process, and what could be better. For obvious reasons, their comments are anonymized.

The Process Today

Sales Exec #1 described the process this way: “Procurement is involved more and more. We’ve gone from an environment from where you’re presenting the best solution for a client based on your understanding of their business challenges, to one where you’re more worried about being procurement compliant. The entire process is very regimented and there are many rules that were designed to prevent an emotional decision. But companies have taken it so far that they’ve impaired their company’s ability to make a good business decision.” Sales Execs #2 and #3 agreed.

What’s The Problem?

Sales Exec #2 complained that the RFI/RFP (request-for-information/request-for-proposal) process has become so rigid that it prevents companies from seeing the possibilities that new solutions create. In other words, retailers don’t know what they don’t know, and tend to use the current-state as the basis for future-state capabilities. Sales Exec #1 agreed: “it starts with the selection process. It’s very hands-off. It’s not designed for you to learn the strategic goals and priorities of the company. It’s a 400-page spreadsheet, with 1500 ‘yes/no’ questions. The process is so closed that you only get one hour to ask questions for clarification”.

He equated it to the old parlor game, where each of several people is asked to pass on a little tidbit of info. By the time the last person hears it, it bears little resemblance to what the first person conveyed. “Retailers create the same situation in the RFP process. You and I can read the same question and come up with a completely different interpretation of what it means.” According to #3, “many companies therefore respond with a yes to everything, figuring that they’ll work it out in the demo.”

Assuming that a solution provider gets through that gauntlet, they receive a written notification about the next step, which often states something like this: “you will demonstrate your product 2 weeks from this date, strictly following the attached (40 page) script. Questions will not be allowed.” Sales Exec#2 clarified: “the rules of this are that if you contact anyone within the company, other than your single point of contact (who is often the procurement person), you’re dead.”

The solution is then demo’ed and if selected for the next phase, the solution provider is then presented with a set of rules for how and when to present the best and final offer, often through a secure procurement portal. Alternatively, the solution provider may be instructed to meet with the procurement team in a series of sessions intended to negotiate that best and final offer, often in a back-and-forth competition between two solutions providers.

The concern that the sales execs all expressed is that because of the process, retailers get away from the art of the possible, and instead focus more on today’s processes, whether they’re right or wrong. Said #1, “they (the current processes) get projected onto a future vision that typically, if the retailer has developed the RFP themselves, is very closed- a collection of company veterans’ ideas.”

Solutions Providers Are Not Powerless

One of the built-in assumptions that retailers have about the software acquisition process is that solutions providers will not walk away from a deal. But that’s not true anymore. One sales executive pointed out that every expense associated with a sale is tracked, and at the moment those expenses exceed 10% of the projected top line revenue of the deal, “it goes from ‘green’ to ‘yellow’.” In prior times, sales execs would think in terms of the aggregate revenue vs. cost of all of their wins. Explained Sales Exec #3, “we had one $400,000 deal that cost us $1.2M to land, and another $20M deal that cost us $250,000. The aggregate cost of sale that was less than 10% and we were happy.”

But that is no longer the case for many providers: they now look at the per-deal cost of sales. Although all the sales execs that we talked to were unwilling to reveal at which point a deal goes from ‘yellow’ to ‘red’, they all agreed that they will walk away from a bad deal.

Even if they don’t walk away, solutions providers may overbid the variable parts of a deal (typically, services associated with integration, change management, and quality control) if the negotiations about the price of the solution itself are contentious and expensive.