We recently assisted a start-up e-commerce company (the buyer) in selecting a third party logistics company (3PL). The prospective buyer swore up and down they had commitments from Amazon, Walmart and other big box stores. Because of these commitments, the services required EDI and meeting the compliance standards of all of the retailers. The additional constraints were a major implementation and operating cost. The external vendor took the deal only to see some of those retailers’ purchases not materialize. The business plan ended up flawed, putting the contract and relationship at risk.
Regardless the services you’re negotiating, it’s important to understand how vendors look at your company and the deal you want to cut. Understanding the vendors’ perspective can help ensure a successful relationship.
Here are nine considerations vendors take into account in evaluating deals:
Selling process and effort
How much work is required to get the deal? Vendors may have a tendency to resist answering Requests For Proposals (RFP) because RFPs can be a lot of work. However, our experience is that you may be taking a tremendous risk by not completing an RFP and the necessary analysis. You may spend far more than budgeted; take much longer to implement; and not meet your objectives. Far more projects fail without RFPs than when companies take the time and effort to systematically select a vendor.
How good is the fit?
Is your company or project in the vendor’s sweet spot and core skill sets? Both sides need to be realistic about the potential match up. If it’s a system, is it geared to your size company, and scalable to meet your sales plans? Does it have the functionality required, or are you implementing a system based on more than 20% modifications? If the system requires modifications, it might increase the time frame, cost and risk.
Cost of implementation
How much is the vendor going to have to spend to service your account? Does this involve capital, additional people and IT services? There has been a trend towards companies installing systems and not wanting to pay the full implementation costs upfront. Instead, companies want to extend these fees over the life of the agreement. That may be unacceptable to software companies.
Honesty in the relationship
Our point is that both the buyer and the vendor need to be straightforward and honest with each other to have a great relationship. We worked with dozens of start-ups and emerging companies over the years, so we understand the risk and volatility.
From the vendors’ perspective, they too need to be honest about their company’s capabilities and implementation time frames. What functionality and services exist today versus what they can do in the future or if they get the deal? RFPs and in-depth analysis help clarify this. Companies must be honest about transactional volumes and accurately portraying their company’s processes.
Many vendors can only service a certain number of new clients each year. They have to look at each deal and size up the revenue and profit to determine which clients can bring them in line with their corporate plans. There often is a monthly minimum for services or a total purchase price for software (for licenses and professional fees) that will qualify your deal. The RFP process and the data you provide for pricing and services will help qualify your business from this perspective.
Realistic project timeframes
We can’t tell you how many times we hear prospective buyers hype how fast they are going to make a decision and that they need a quick implementation. But, it ends up – hurry up and wait. Let’s say you’re in the market for a 3PL and the typical customer takes three months to make a selection and 90 to 120 days to implement. However, in evaluating the vendors you tell them unrealistic time frames – like we’ll make a decision in two weeks and expect you to install it the next month. That’s a red flag that the buyer doesn’t have any idea of what needs to be done to reach a fair deal and to implement.
Most vendors, for good reasons, don’t want you calling references until they are in the final mix for selection. They may be responding to hundreds of leads annually and they don’t want you calling references prematurely. It wears out the good will of the reference. Do your homework, get through the RFP process, see comprehensive demos and then call references.
Assessing business risk
There are many different factors in evaluating risk. Often, business owners want burdensome contractual clauses about liability for damages to their business. We are not legal counselors, so we cannot address this adequately. We will say that there are very few cases where buyers are successful in getting this into a contract – many times vendors walk.
Another aspect of risk with clients is getting paid on time. For example, as the cost of shipping keeps increasing, who pays for the freight in a 3PL contract definitely enters the equation. The 3PL can likely provide lower shipping costs from volume discounts using their carrier account - but they must pay the carrier invoices on time. For businesses that appear to be more risky, the 3PL may want you to use your own account. Vendors may ask you to provide credit references as part of the selling process.
Decision makers meeting
From the buyer’s perspective (i.e. distributor or retail company), don’t let the salesman short circuit the team’s selection steps and due diligence (e.g. reference calls and site visits). However, the team also needs to be realistic. The final deal will not be struck until both companies’ decision-makers meet and talk directly. From the aspect of the salesman, he probably does not have authority to commit his company. Many times, salesmen have to sell their management on why this is a deal they should take.
To reach a “win-win”, both sides must understand what the other sees as risk, obstacles to making the sale and potential benefits. Happy hunting!