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There's Often a Price to Pay for Lowest Cost

There's Often a Price to Pay for Lowest Cost

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David Canton (London, ON., Lawyer)

 

When negotiating an agreement for the purchase of goods or services, some buyers try to get the vendor down to the lowest possible price. That may not be the best approach, however, because it can affect the quality of services you receive and may end up costing more.

Sometimes the saying "you get what you pay for" is true. Often getting a reasonable price is better than getting the lowest price.

This is especially true for anything requiring ongoing work. It applies to virtually any service, from office cleaning to equipment repair. Let's use a major software installation as an example.

You enter into an agreement with a vendor to purchase a new system that might include various pieces of software, hardware, training, installation and implementation, project management and ongoing maintenance.

If you grind the price down so far that it leaves little or no margin for the vendor, the vendor will be inclined to spend as little time as possible performing the services.

To make a profit, the vendor naturally will try to limit his costs by cutting corners. He may not be attentive to project details or buyer needs. He also will be more likely to provide the bare minimum services required by the deal and strictly construe its obligations in the agreement. The vendor will be less inclined to do extra work that comes up throughout the project without insisting on a further fee.

For example, training may be cut short, not enough attention might be paid to managing the project, and response times for service might be slow. You may end up doing things the vendor perhaps should have done. The implementation may take longer and have more frustrations than it should. In the end, all these things could cost you more time, frustration -- and money.

It essentially becomes difficult to motivate the vendor, which will want to do only the minimum necessary. While having a clear, well-drafted agreement setting out the vendor's obligations is important, no agreement will help if the vendor is not motivated to perform.

It is often said that an effective negotiation is one in which neither party is 100-per-cent satisfied with the result. That may sound odd, but it is far better for each party to feel it's getting some value out of the arrangement, including the vendor feeling it will make a fair profit.

On the flip side, if you as a vendor negotiating a sale feel you're getting badly beaten up over price and don't like where the deal may be headed, it is sometimes better to end the negotiation than to get into a position where there is no profit in the deal. The natural inclination to do the bare minimum possible, and the lack of motivation may lead to substandard work and damage your reputation.

Read this on Canoe

Comments
  • As a tech in our company, We tried to save the customers money years ago, and it always bit you in the back.  

    As my boss likes to say, there are short term costs and long term costs.

    So that $400 computer you bought may have saved you $100 today.   But when it's reliability becomes an issue, what did your downtime cost you?  Or band-aiding and extending the life of an old production server for long term use.

    Example.  Lawyer billing $450 per hour, down for one hour.  Therefore just lost $450 plus whatever money his assistant (or team of assistants) cost him.   Then let's not even get into if it was in the middle of a large land closing deal.  *EEP*

    Sometimes the customer isn't initially happy with that extra $100 (or in some cases $10000 for a new set of switches).  

    But when they're not down for the next year becuase the new equipemnt that cost more allows them to be more productive, they tend to be a lot happier in the long-term.

    It works the same with with us smaller guys and our customers.   Nice to see somebody else in the same line of thought.

  • As someone who has been on both sides of the table many times as a Project Manager your sentiments offer sound advice. Basically if you try and "screw" somebody they are far more inclined to look for a future opportunity to "screw" you. It is only human nature after all. What goes around, comes around. If you cannot find that "win-win" position there will be tears somewhere along the line!

    Cheers

    Graham J.

  • For the London Free Press - July 16, 2007 Read this on Canoe UPDATE: This post was reproduced on the ITManagers blog and received some positive comments. When negotiating an agreement for the purchase of goods or services, some buyers...

  • This is very sound advice - hurting someone you're negotiating with very rarely produces long-term durable results and working relationships.  If someone feels "taken" either during or after the negotiation, chances are it will affect their follow through with the agreement.  

    However, both parties can in fact be 100% satisfied with the results, especially if the satisfaction of the negotiation is not based solely on price.  Negotiators often care about a great deal beyond price, yet focus on that one aspect of the negotiation.  Studies show that price ranks 3rd or 4th in terms of what makes for a satisfactory agreement.

    At MWI, a Boston-based spin off of the Harvard Negotiation Project, we design customized trainings that teach people how to find, claim and offer maximum value for all parties in a negotiation, while costing each party as little as possible.  This is done by learning to uncover the interests of the other party as well as one's own.  Once those interests are uncovered, each negotiator can often find ways to meet the other's interests at little cost to themselves.  For example, besides cost, businesses are often interested in reputation, referrals, advertising, and other non-monetary negotiable aspects.  Very often these items can be included in a negotiated agreement.

    If you can find a way to bring more value to a negotiating partner (and I used the term partner intentionally), they may be willing to pay more for your services or they may be willing to offer you other services that meet your interests better than additional money.

    Please feel free to contact me with questions about these ideas or for information about our training programs.  I can be reached at 800-348-4888 x24 or sfrenkel@mwi.org.  More information about MWI can be found at www.mwi.org.

  • Its good to see such positive comments about my article.  My article and all the comments are consistent with the previous comment by Stephen Frenkel about interests based negotiation.  Any negotiation is as much about understanding the other party's wants/needs as your own.  And don't forget to spend some time figuring out what your own needs and interests are - they may not be obvious at the outset.

    I often tell clients contemplating an arrangement with another party to take some time to write down what they want from the deal, and what issues are important.  Then put yourself in the other person's head and do the same.

    I recall a particular deal several years ago where I represented a large company that was negotiating with an equally large company for an arrangement that was out of the ordinary at the time.  When it was over, we were happy with the result.  We found that the other party was happy with the result too - so much so that they sent me a note thanking me for being fair and listening to their needs.  That might seem odd, but it was because we did actually listen, and tried to find ways to address the interests of both parties.

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