The Shaky Negotiator – Dev Shop Dilemmas

(This article was first published in the ‘Outsource UK’ Magazine –

In almost all cases where small businesses go to external software development firms to build products or internal IT systems there is always a contract negotiation situation. In that, price becomes a very sticky point of contention. This happens in every deal and almost magically, most software development companies that ContractIQ works with (typically teams with under 500 employees), tend to either wing it or give away more than they should have.

Contract negotiations, re-tendering, price benchmarking or even proxy bids are quite the way of life in large enterprises and the vendors that work with them.

So what’s different in the small business landscape, specifically with the vendors that serve them?

We dug deeper to understand why small application development vendors often are at loss when it comes to price negotiations. Here’s what we think is happening (based on participation in about 50 price negotiations in the last year) :

  1. [tweetherder]The principals in charge of making pricing decisions do not like to make those decisions[/tweetherder]. Most small software development firms are run by founders who are geeks.  They dislike situations that involve guessing motives and intentions.
  2. Perceived competition. Most sales executives think their competitors to be more aggressive with price and faster than them, with respect to decision-making.  It’s the fear of the unknown, as, in 90 per cent of the cases, the competition is an unknown entity from far-flung places like India or Eastern Europe.
  3. Perceived homogeneity of offerings. Most sales executives who give liberal discounts without standing their ground believe that they are selling commodity. The perception of service quality and reliability varies dramatically within the organisation depending on whether you speak to those close to delivery or those close to sales. Small vendors lack in enabling sales teams with a keen understanding of how software gets developed and test within their own organisations.
  4. Lack of financial awareness. Even at the founding team level, several vendor firms do not understand the difference between concepts like markups and markdowns, net margin and contribution margin. They end up taking decisions on a deal-to-deal basis, based on contribution margins, while running an unsustainable business from a gross margin perspective. Lead scoring and the impact of a deal on total targets are rarely taken into account while negotiating.

So if you are a software development firm, how do you negotiate like a pro?

  1. [tweetherder]Focus on sales enablement[/tweetherder]. Right from your website, to your sales team and the documents you share, should communicate ‘premium-ness’. In the lack of precedence in working with you, your touch points with the prospect are proxy indicators of your value. Never compromise your spend on these.
  2. Go granular on your estimates. If you are quoting on a fixed price model, your quote is as good as the buyer’s ability to understand it. [tweetherder]Give them the confidence that you arrive at a final number based on rigorous analysis of the expected system behaviour and be willing to demonstrate it through a granular work breakdown.[/tweetherder]
  3. Don’t pre-empt discounting. In many instances, we see overzealous dev firms discounting their price even before the customer asks for it – and when they do, the dev firms whose price by now has been cut to the skin of the teeth, have no way to discount further. Instead try quoting your card rates and [tweetherder]offer discounts after the negotiation process has kicked in.[/tweetherder] Deep discounting cuts the flexibility of the vendor in managing scope overruns. Often negotiations while the project is on are messier than doing it right at the beginning.
  4. Don’t do piecemeal negotiations. Don’t make pricing decisions on the fly. Often a price discount is not the best thing for the customer. Ask them if they have any other expectations. Check what their plans are, post product release. Ask them if they are prepared for a support contract. You’d be surprised to see how well it works to subsidise future expenses of the customer and keep them engaged with you rather than having to go back to the negotiation table at every instance.
  5. Consider non-monetary discounts. Discounting with dollars is often inflexible when compared to discounting with services. Offer extended warranty or additional support. Offer to do a thing or two more that are essential. By doing so, you set the price at its best reference/sanctity point for future engagements or any referrals that your customer shall bring.

Successfully scaled mid-sized software development firms have done a few things right:

  1. They made a transition from passion- and reference-driven client acquisition to a structured lead generation and sales process.
  2. They invested in developing both the commercial intelligence of the delivery organisation and the service know-how of the sales organisation.
  3. They had lead scoring mechanisms that automatically triggered rules for pricing and negotiation.

Are you a small software development vendor who is making a successful sales transition? How are you managing it?

Also read What you’re signing up for when you do Fixed Bid, Time and Material contracts?