In one of our most engaging roundtables ever, seven Canadian IT executives frankly exchanged their views about their relationships with vendors – everything from contracting hot buttons to over-the-top social invitations to dealing with lowball bidders. Here are the highlights:
Atkins: How do you deal with a vendor that you have awarded business to when you find out that you have been lowballed on price?
Georgeff: Lowballing and bait-and-switch are my two pet peeves. It is a reality that seems to be created by the fact that the Province is always in a competitive bid situation and therefore vendors oft-times, out of fear that they are going to lose the business, put in a lowball bid. I think that this has been built up over the years with a feeling that the government, because of a fear of the “front page news” ramifications, will tend to make good and pick up the pieces afterwards. I do not think that culturally the notion of the vendors continually underbidding for business or using bait-and-switch tactics is a healthy practice for either economic development or government service delivery.
Gupta: We hold the vendor’s feet to the fire because obviously our budgets are set beforehand and it becomes a huge challenge. Not to say that we don’t sit and talk to them and figure out why it happened. One of the strategies that I have adopted is negotiating to put the difference between what they bid and the actual cost into the next contract, instead of trying to get it in the current one. This forces the vendor to perform well on the current contract and it is an incentive that they will make up the money in the next one. That strategy has worked with a couple of vendors that have lowballed us recently. The other challenge always is that the vendor tries to make money on support after the job is finished. That’s why we always dangle the carrot on future work. In order to avoid this type of situation, we try to do fixed-price contracts. With fixed price we usually include an incentive – if you come in below the fixed price we will share the difference half and half.
Atkins: Beyond the RFP process, what does your organization do to ensure that it pays a competitive price for the technologies and services that it purchases?
Tien: First we try to leverage our global agreements. But there are times when global agreements don’t get us the best deal. The local deals – because of the relationship with our vendor – sometimes give us more advantages. We have divided our work into two areas. The infrastructure/technology area is clear-cut, where we aim for a suite of products with a competitive price and the best service level agreement. We put more emphasis on the SLA because it presents more opportunity for productivity gain. In the maintenance, support and development areas, we expect the vendor to practice continuous improvement that will result in productivity gain. This doesn’t mean that every year we pay them less, because if they do better we will give them more business and therefore their revenue may actually increase over time. This requirement for continuous improvement can be quite foreign for some vendors, but I tell them quite frankly, “That’s our culture. Welcome to Toyota.”
Adamo: We maintain an extensive database of previous pricing that we have received at other points in time. We also have the advantage of being able to leverage against the Province’s standing agreements, but to be quite honest we start with the standing agreement and go better; if we can’t better it there is a problem. We put a lot of time in assuring that vendors have appropriately understood how to price. Often times even though we have gone to an RFP we will go back with deep clarifying questions to ensure that the vendor has correctly understood what we are asking them to price, because by and large we ask for a price guarantee with a de-escalation clause over a period of time. We then benchmark those prices and benchmark again on an annualized basis even after the deal has taken place, and re-negotiate if required .
Atkins: How do you ensure that the vendor provides you with the right expertise to get the job done?
Cantafio: It’s basically making sure that you get to see the biographies and backGround information on the individuals that are going to be assigned to the project. You also have to meet with the individuals that are going to be on the project and make sure that the project manager has the chance to interview them and assess them. Reference checks are an absolute must, and we use a piloting approach as well. A lot of effort has got to be put into making sure you’re getting the “A team” from the vendor of choice, because if they sell you with the “A team” and you are getting the juniors, or others with insufficient expertise, you may be getting price but you are not necessarily getting the right competencies.
Ground: What we have tried to do with some vendors is to get the pre-sales person, who seems to know the business and the application, on the team itself. A pre-sales person comes in, learns the business, gives the pitch, and typically they are gone – it is handed over to some other group which now has to go through the same learning curve. The discussions you have had have been lost somewhere in the ozone layer and you are starting over. So, in some situations, we have negotiated that the pre-sales person actually becomes an implementation person.
Atkins: After lowball pricing, what is your biggest pet peeve and why?
Schwartz: Mine is vendors that are continually in the sales cycle, without taking the time to understand our business. Vendors must truly understand who we are, what it is we want to do, and what our objectives are before they try to sell us on solutions. Also, there are a couple of monopolies out there, from both the services and communications side, that drive me crazy when it comes to their one-sided, onerous and inflexible contracts. Finally, there are the vendors that don’t seem to understand that they need to continue to earn the business as opposed to just getting it rewarded to them. They almost seem to take the business for granted – they think you are married and you can’t ever divorce. This is a long-term relationship and you have to work at it.
Georgeff: My biggest pet peeve after lowball pricing would be an issue that is specific to Canada, and that is the notion of misrepresentation – agreeing to something in a contract and not delivering. Why it is a problem in Canada has to do with the inability of the Canadian organization to influence the American part of their organization. A contract clause calls for something to be available on such and such a date, but the date comes and goes. Why? Because the Canadian organization cannot influence the U.S. organization to build it.
Tien: What I find is that after you have done your first project with a vendor – the cost is right, the people are right, everything is right – when it comes to renewal it’s a whole new ball game. Our expectation is that the vendor will continue to work hard to earn our business whether it is regarding annual increase, service level, or change management. This may not always be the case. In some cases, we have been presented with a very unreasonable price increase. We want the vendor to make money too because this gives them the incentive to work with us, but they must be market competitive. So that would be a key pet peeve – it’s still about pricing but it is not lowball anymore, it’s highball.
Gupta: When we set up a contract with a vendor one of the things we do is explain the business value of that IT project. In the contract it is very difficult to define that right up front. The challenge comes after the deliverables happen – are they really delivering value or not? Do we need to tweak those deliverables? What usually happens then is that the vendor will try to renegotiate the next phase based on our discussion, and that is where they try to make money. They stick the contract in your face and say “this is not what it said”. To me vendor management is a long-term relationship, not a one-shot deal. We are both in this together. Let’s get this done. You’ve got to give and we will give.
Ground: One of my pet peeves relates to vendors that use the car dealership method of negotiating. They bring in a price, you give them a counter-offer, and they say they have to go back to management to get approval – it’s back and forth, back and forth. It sets up a very adversarial relationship and a very slow process. You should be able to just sit down, get to a quick resolution, and come up with a fair price. You don’t want them going out of business, but you also need to get a good deal for your company. We also find that with some of the big vendors, their contract terms are very onerous and not customer friendly at all. We are starting to see a difference now, where some vendors are bringing forward a contract that is reasonable. And if it is reasonable it makes the whole process much faster.
Atkins: How do you view interactions with vendors? Is vendor social interaction acceptable? If so, what kinds and at what levels?
Adamo: At the Workplace Safety & Insurance Board we are governed by a fairly strict set of requirements around vendor-paid social interaction. The only time that it is relatively safe is if there is a charitable context. That’s not to say that we never do this type of thing, but it has to be relevant, it has to be a group of our peers, and it can’t be an outlandish event. It has to be something that is generally available to all customers and with a business purpose in mind. If in doubt, our answer is always: if you want to go then go, but pay for it yourself. When I speak to my vendors I talk about being a really cheap date because I don’t do lunches and things of that nature with any great frequency, and when I do it is usually reciprocal – you have done it this time, I will do it next time. I think there is a higher expectation on the public sector that it should be done this way. Personally, I think the standards shouldn’t be any different between public- and private-sector individuals. We should all be subject to the same level of transparency and high expectations of conduct.
Schwartz: The Katz Group does have policies, both formal and informal, in place. We think these types of things are inappropriate while you are in the courting stage. When it’s a new vendor and you really haven’t established a relationship, it is inappropriate and we will always refuse. In the last three years we’ve had invitations to the Molson Indy in Montreal and the Masters. These are very expensive trips and we became quite angry with the vendors and said, “We would rather you take the dollars for the cost of a three-day Masters trip and give us a discount on our maintenance or software.” So we actually take offence to it. However, all of our executives are very time-compressed and they do have to eat, so we tend to have a lot of meetings over lunch or dinner. And sometimes in a more casual setting a little more can be said. As for charitable events – for instance, golf – as long as there is a business purpose behind it, we will attend. We also ensure that the right people at the senior levels golf together, because spending several hours on the golf course gives you a lot of time to talk to the issues.
Atkins: We often hear the word partnership used to describe the relationship between a client and a vendor. How would you define partnership?
Cantafio: I think it is a critical element in decision-making to find someone you can feel is a partner. A partnership has got to be based on trust. If you get to that level, the vendor you are working with becomes an extension of your organization. Sometimes it depends on how the vendor responds when you complain about something. You want to know they are in the trenches with you when you need their help and support. You want to know that they have got the expertise that you require, and they must keep up with the right level of expertise for your needs. The relationship is a key element that has to be worked on – not only the relationship with the vendor but also with the people. Because people do move around and once you find the good ones, you may wish to continue working with them in the future.
Georgeff: I would define partnership as an illusion. The notion of partnership is quite similar in context to Cinderella, and the unfortunate part is that very few of us have a fairy godmother that is going to turn the pumpkin into a coach. The other problem with the Cinderella story is that even when the pumpkin is turned into a coach for a period of time, at midnight it turns back into a pumpkin. There is nothing in my experience either in the private sector or the public sector that would lead me to believe that a partnership in any formulation is actually achievable.
Atkins: Dozens or even hundreds of vendors call each one of you, trying to get your attention. How do you determine which vendors you will meet with?
Adamo: I spend a lot of time making sure that the ‘phone people’ don’t get at me; for example, although I do have a published phone number, I don’t maintain voice mail. People can send me an e-mail promo, all of which I do scan, and I do a fair amount of magazine reading as well. I spend a fair bit of time with existing vendors. With new vendors, I spend time acquainting them with how the organization works and who they need to work with, listen to, and influence. I will also give a lot of access to vendors who are likely to bid on something that is important to us within the coming 12 months. I spend a lot of time levelling the playing field and acquainting them with how our organization works.
Ground: One thing that we try to do at Sony – and it’s difficult when dealing with vendors – is to do it on our agenda, not on the vendor’s agenda. We have put together our plans for the year and that is what we want to be working on. If you entertained every vendor that came in with a solution/service, you’d be spending all your time with vendors. So we try to structure within that environment. We bring in our major vendors once a year – go top to bottom on everything we are doing so that they understand what we are working on and they will know when to bring things forward. In this way we don’t have a key vendor bringing in everything in the first month of the year because they think that is the time to sell.
Cantafio: I agree that a lot of it is dependant on timing – if I have a need and someone has piqued my interest or has something that might fill that need, I will meet with them. On several occasions when we’ve been wrestling with difficult issues, we have brought vendors in to present their case, and let them sit through each other’s presentations. Then we start to analyze the similarities and differences in order to better understand the key issues and approaches from a number of perspectives. I also like to read trade journals and subscribe to Web-based information sources. By keeping up with articles, I sometimes find out about someone who is doing something similar, and then I may bring that vendor in.
Atkins: What are some contracting issues that are hot buttons for you?
Gupta: Limitation of liability is a huge hot button for Fairmont because of the business impact to us if, for example, our reservation system goes down. This can be very costly because a lot of business goes through it. And so limitation of liability is something that we try to negotiate each time. But obviously this is difficult. The loss of potential business almost always outweighs the purchase price of the product. Another hot button for us is that Fairmont is doing many new and innovative things, and we have difficulty getting some vendors to push these ideas to our competitors. If we help the vendor develop something, we actually encourage them to implement it with their other customers. The idea is that they will support us better over the long term. But getting the vendor to push these things can be very difficult.
Schwartz: Like Vineet, limitation of liability is a big hot button for us. It is something the legal beagles always try to insert into the contracts. We try the usual 4X clause and it always gets kicked back. In the U.S., regarding the IT services component, we are seeing more and more contracts which include performance bonds, and yet that hasn’t entered the mindset of Canadian companies or companies that operate out of Canada. They just can’t get their heads around the fact that you should have a performance bond or that they should be held somewhat liable in the event that there is an overrun. Hopefully at some point this will come.
Tien: Intellectual property is a hot-button issue for us. We buy off-the-shelf software and use it to meet our business needs. At Toyota, we focus a lot on process improvement and these innovative processes end up in the software. If this is claimed as part of the vendor’s property then that would be a problem for us. We debate a lot with our vendors on this. The best we’ve done so far is agree to not offer these specific features of the product to the public. But the debate on who owns what is still an ongoing issue for us. Another issue we’re bumping into a lot more is the release of people on the project team from working on the next projects. If they go to work for our competitors we run into problems, especially when they have been working in confidential areas involving highly innovative Toyota items. Although they don’t reuse the code, they can develop something very similar for the other company, and they can do it faster and with less problems compared to when they gained their experience with us.
Atkins: What advice you would give vendors to make them more effective or valuable to you?
Georgeff: For folks to be of more value to me, they have to appreciate that for things that are available today, I am seldom the one that has to be sold. What I am interested in is what you can deliver 6 months, 12 months, 24 months from now. If I am looking at a product that exists today then I am not doing my job. I need to look at it in a year from now, and that is what I need the vendors to tell me. They would be much more valuable to me if they would do that and articulate their direction, articulate the future of the product, and articulate the value of their R&D stream over time, rather than focusing on the here and now.
Ground: As a starting point to understanding, vendors should be bringing us a future perspective. Where is the industry going? Where is this product going? That side is important. Responding quickly to issues through the acquisition process is one of the things that would make my life easier. I want the vendor to bring the right product at the best price the very first time. Then you don’t get into that long negotiation process. Another key element would be to keep up the pre-sales interest/involvement after implementation. Don’t just sign the deal and walk away – keep coming in with new ideas to help us maximize the benefits from the application/solution (even if there is no additional revenue in this particular area).
Adamo: Vendors should not only know my organization but also specifically know how we buy what it is they are selling. My willingness or ability to influence something that I am going to buy this week or next month is slim to non-existent. I support and respect the people in my organization who are doing that work and making that recommendation. Where I am willing to spend my time is thinking through the evolving world before us and how that is going to shape my thoughts, my strategies and my recommendations to the organization on a very senior level as we go forward. If you really want me to be able to advocate for your business or your strategy, I have to understand in a fairly transparent way what you need. I want to know where you need to make money, how much you need to make, and why. I want to know and understand where you are growing and where you are not growing. There must be senior-level to senior-level contact so that I can truly understand where the senior people are taking the organization – not next week or next month but over the next two to five years. I need to know who in the vendor’s organization I need to influence to better align our organizations to meet WSIB’s needs and direction.
Cantafio: Of course there are the usual things like understand our business and understand our culture and needs. Vendors also need to explain their vision and help us understand the future of the sector they are in so we can get different perspectives. In effect you need a vendor that understands where they are going and where the industry is going – a vendor that will be viable for the foreseeable future and which is looking to provide the integration that we need with other products and other services.
Schwartz: I would give the vendors three points to ponder. First, be a part of our planning process and fully understand our strategic objectives as a company. Second, keep us ahead of the curve and bring leading-edge retail solutions to the table. And third, lower our total cost of ownership. Those three key points will ensure that we stay competitively advantaged, thus creating a win-win relationship with the vendors we do business with.
Tien: I would like the vendor to be more proactive in dealing with the company. Given that they understand our strategy and that we share our planning with them, they should come to us with articulated values and an action plan. Rather than saying, “Tell us your problem and we will help you solve it,” they should be saying, “We’ve got an idea. What about this?” They should share with us what’s happening in the industry, what their mid-term plan of attack is, and how this plan would help Toyota achieve its goals.
Gupta: As well as understanding the business, vendors need to understand our issues within the business. That is the challenge: how do you communicate those issues unless you have gone through it? The challenge is twofold: how does that communication happen and do the vendors really understand the issues before they come up with the solution? Another issue I constantly face is getting the vendor, once he has understood our issue, to escalate it within his organization in order to attack it – rather than making it necessary for me to call up their CEO or president to get something done. If the vendor would really make the effort to escalate the problem to the right levels internally that would solve a lot of the problems we have.
What’s your pet peeve? Got a pet peeve of your own about lowballing, contracts, sales practices or any other aspect of your relationship with vendors? We’d like to hear about it. Send us your comments at [email protected].