By: Phil Ye -- Senior Manager -- Strategic Sourcing, New Relic Inc.
18 August, 2019
(Photo Credit: Phil Ye )
The value of securing on-time project delivery from a supplier sometimes far exceeds the reduced purchase price obtained through a vigorous negotiation. Settling on a fair price helps maintain a collaborative supplier relationship; in some cases, it can even help convert a supplier into a potential customer. I would like to share a real-life story on how Marketing Department and Strategic Sourcing worked together to achieve speed-to-market at a fair price in a software implementation project.
Adobe Analytics is a SaaS solution that utilizes real-time analytics and continuously improves marketers’ digital marketing experiences. Implementing Adobe Analytics requires the services of trained professionals with specialized knowledge to plan, customize, and execute. An Adobe implementation partner was chosen to deploy the solution in the case described here.
The implementation timeline was once at risk of being delayed because pricing exceeded the approved budget. We would have had to wait to get additional budget funds appropriated or move budget allocations from other initiatives to this project. Neither option was ideal. To ensure an on-time solution, we needed the implementer to reduce the price by at least 20 percent.
By aligning with Marketing on a negotiation strategy, we executed a negotiation plan that gained the following desired results:
1) Trimmed the project price by 26 percent,
2) Enabled timely project start and completion, and
3) Helped maintain a collaborative supplier relationship.
These achievements paved the way for Marketing personnel to begin utilizing the solution in a production environment.
The measures that Strategic Sourcing takes to bring value beyond cost (VBC) to Marketing are also applicable to several other categories managed by it.
1. Form Internal Alliance
The critical step prior to a negotiation is to fully understand each stakeholder’s goals. In this case, it was a timely system setup within an approved spending limit. Strategic Sourcing and stakeholders needed to reach a consensus about the ultimate result we wanted to achieve before developing a step-by-step plan to get there (i.e., negotiation strategy and plan development).
2. Build a Cost Model
To understand how a supplier prices services and identify benchmarks with market data—thereby ensuring that the business is charged fairly—it is necessary to acquire from a supplier or independently build an itemized cost model. A cost model of a professional service should cover the roles of each supplier’s personnel, their hourly rates, and total hours needed for each project phase. It is also necessary to verify and sometimes negotiate rate cards and billable hours to justify the total project price. Qualifying mid- to senior-level supplier personnel by reviewing their CVs, conducting interviews, and ensuring that these approved resources will actually work for a certain project are other important elements.
3. Develop an Enforceable Timeline
Often represented by daily or weekly activities and milestones on a Gantt chart, an enforceable project timeline should align with the desired launch date, factor in the availability of resources from both contract parties throughout the project, and sometimes include a reasonable cushion. Depending on the client and project, a typical end-to-end software solution implementation project may comprise some or all of the following phases: requirement analysis, design, development/coding, testing, deployment/implementation, and maintenance. Variations in names of these project life cycle phases may be seen elsewhere.
4. Seal with Fixed Pricing
Unless a client knows exactly how to deploy a software solution and purposefully hires an external company to do it to save costs, it is usually better to let the supplier handle the work that they anyway engage in every day. In the aforementioned case, we wanted to construct a fixed-price service contract to cap the maximum expenditure. Payments were made throughout the project only after we accepted the supplier’s work. This approach contrasts with a time and materials (T&A) contract. We chose the fixed-price model to make the supplier fully accountable for the quality of work and successful launch of the solution.
When using a T&A model, it is important to keep a close eye on the billed hours and project progress. The responsibility to keep a project on track and on budget usually lies with the client.
A thorough understanding of business requirements is the first step towards effective negotiation with suppliers. From there on, we need to fully align with our internal stakeholders on negotiation outcome, strategy, and an actionable plan. Ultimately, it is our stakeholder who works with a supplier on a day-to-day basis after a contract is signed. By partnering with the business team, we can help create a productive supplier relationship for them. This is especially important when a supplier is our existing or future customer.