Negotiation Best Practices VAGP Conference Spring 2010

1. Negotiation Best PracticesVAGP Conference Spring 2010 Presented by: Sonja Headley VITA Policy & Compliance Quan B. Myles VITA Supply Chain Management

2. INTRODUCTIONS Who We are and Why We’re Here

3. Negotiation Strategy Planning A Buyer’s Crucial Need-to-Knows The Risk Toss of Negotiations Wrap-up Questions WHAT WE WILL COVER TODAY

4. NEGOTIATION STRATEGY PREPARATION & PLANNING “He who fails to plan, plans to fail” ~Winston Churchill

5. NEGOTIATION STRATEGY BASICS Prepare! Prepare!! PREPARE!!! Research your market Have a “Negotiations Tool Kit” Know the most often negotiated terms Define your “Negotiations Team” and roles

6. Category Management Contract Mgmt. Purchasing Operations Supplier Management Sourcing VITA Supply Chain Management • Category contract & sourcing plan • SLA determination • Strategy & communication • Sourcing process • Negotiation strategy • Contract negotiations • Market analysis • Pricing analysis • Develop custom contracts • Mitigate supplier risk • Negotiate contract modifications • Monitor contract pricing • Contract use review • Cooperative contracts • Contract administration • Bids, small procurements, quick quotes • Purchasing operations • Order management • P-card • NG Partnership transactions (P2P) • Supplier relationship management • Monitor supplier performance • SLA tracking, reporting & management • Supplier relationship methodology Focus area Policy Planning and Analysis

7. MARKET RESEARCH RESOURCES Free Directories (examples): Yahoo Finance – http://biz.yahoo.com/ic/ind_index.html Ariba Network Discovery - https://service.ariba.com/Discovery.aw/691258/aw?awh=r&aws=ZiJVYD7L0Pv4WgpV&awssk=&dard=1 Thomas Register /Thomasnet - www.thomasnet.com Global Spec – www.globalspec.com; engineering directory Special Issues - www.specialissues.com ; good for rankings, buyer guides, etc. Industrial Quick Search - www.industrialquicksearch.com Online Publications and Resources CIO e-Magazine www.cio.com ZD Net www.zdnet.com Purchasing.com www.purchasing.com Annual Reports www.annualreports.com

8. Negotiation preparation builds on a solid fact base and ensures effective negotiation execution Establish Common Vision and Objectives Negotiation Preparation Identify/Evaluate Options Select Negotiating Team CoordinateNegotiations with OtherNegotiations In Progress Develop NegotiationMessages ForSuppliers Script TeamMembers’Participation Plan SequenceAnd Timing OfSupplier Contacts Negotiation Execution

9. Category Sourcing Objective Potential Negotiation Levers Product • Guarantee of consistent quality at all facilities statewide • Commitment to the continuous design improvement of new parts • Relief for warranty costs • Warranty recourse • Regular component audits • OEM testing lab costs and resources Support • Web-based access to product information • Dedicated sales and technical staff • 24 hour response to disasters/emergencies • Web capabilities – current and planned • Number of support personnel • Emergency response systems Availability • Guaranteed availability within 20% of forecast • Minimal transportation and inventory cost • Availability guarantees • Delivery and carrying costs • Delivery frequency Price • Secure lowest market pricing – (target 15% reduction) • Pricing protection formula to protects against market swings • Pricing model and indexing • Competitive Pricing clause • Payment terms; Early Payment discounts Example The first task is to refine and record team’s objectives

10. You need to understand key negotiation concepts to leverage information and our analysis frameworks Key Negotiation Concepts

11. Determine negotiation team roles prior to a negotiation, the negotiations team requires a mix of skills Team Negotiations: Potential Roles Assigning team member roles should be based on skill set, NOT on title or position

12. Prepare carefully scripted and agreed responses to anticipated supplier questions so that the entire team is “on message” and consistent Think carefully about which questions are appropriate to answer and to maintain a level playing field of information

13. Anticipate potential supplier retaliation and have appropriate responses ready Example

14. DOCUMENT YOUR NEGOTIATION STRATEGY • Prepare your Negotiation Strategy PlaybookResource:IT Procurement Manual: BUY IT • Know the most often negotiated terms • Develop negotiation messages for the Team and Suppliers

15. A BUYER’S CRUCIAL NEED-TO-KNOWS “The more you read and learn, the less your adversary will know.” ~Sun Tzu, The Art of War

16. A BUYER’S CRUCIAL NEED-TO-KNOWS Understand your procurement’s business needs/budget Understand the supplier’s market, challenges and concerns Your non-negotiable points (statutory, technical/functional, other) Your targets and walk-away issues

17. Your Non-Negotiable Points (statutory, technical/functional, other) • Statutory • Code of Virginia • VPPA • Executive Orders in Effect • for Executive Branch Agencies • ARRA • Reporting requirements, unique Federal grant requirements • Confidentiality • Examples: HIPAA, personal data, construction design (security), IP, trade secrets • Federal Flow-Down Terms • If Federal funds are paying for the acquisition

18. Your Non-Negotiable Points (statutory, technical/functional, other) • Technical/functional (examples) • Product specifications, engineering standards, building codes • Service levels, performance requirements • Security requirements • Hosting requirements • Integration with certain legacy systems • Installation times • Days required for testing • VITA Technology Standards (COVA standards for technology projects) • Other (examples) • Schedule (based on federal grants, fiscal year restrictions or other dependencies) • Budget (contingency, outyear) • Indemnification/liability (uncapped or limited) • Special insurance requirements, bonds or certification/licensure requirements • Escrow agreement (for technology) • Reporting requirements (subcontractor, DMBE, performance, project status) • No “Evergreen” clauses

19. Your Targets and Walk-Away Issues Before you release the solicitation, “begin with the end in mind” 1 • Know the negotiation targets for your procurement • Business, management, technical, functional, performance, price, etc. • Study industry, market, references to know many of the supplier’s target issues • White papers, industry publications • Other agencies’ and states’ procurement experience • Your previous experience with same or similar vendor or procurement • Burn up a white board with pros and cons, risks and mitigations, this for that thinking • Be creative, flexible, balanced and in the end, certain IT Procurement Manual: BUY IT 1Steven R. Covey, The 7 Habits of Highly Effective People

20. Your Targets and Walk-Away Issues • Know your walk-away issues • Non-negotiable terms and conditions, mandatory requirements • Know as much as you can about the supplier’s walk-away issues • They will vary based on the procurement category (construction vs. IT, product vs. service, COTS vs. developed) • They will vary based on the size the supplier (IBM or Oracle vs. small business) • They may vary depending on client (check in with other clients) • Negotiating with 2 suppliers will increase your success

21. THE RISK TOSS OF NEGOTIATIONS “Imaginative, sanguine men will never recognize that in negotiations the most dangerous moment of all is when everything is moving according to their wishes.” ~Honore de Balzac

22. THE RISK TOSS OF NEGOTIATIONS • Negotiations Should Maintain a Balanced Project (or Risk Re-assignment) • Warranties – Supplier Promises • Negotiating Performance Criteria — Service Level Agreements • It’s Give and Take, Nothing is for Free

23. Negotiations Should Maintain a Balanced Project (or Risk Re-assignment) Your solicitation and negotiation strategy compose the baseline from which to negotiate, so ensure these documents are balanced in the beginning. Ensure balanced risks for both parties are maintained throughout negotiations. Ensure no compromises are made to impact mandatory compliance and procurement requirements, the project’s business, technical and functional requirements, or the supplier’s financial viability or performance ability. Ensure the scope of the original solicitation does not change during negotiations (can you change that without protest liability or do you have to resolicit?) What new or hidden risks will emerge if supplier doesn’t accept certain terms, conditions, or non-mandatory/desired scope requirements? The more complex the procurement, the harder you must scrutinize interrelationships between negotiation points and outcomes.

24. Negotiations Should Maintain a Balanced Project (or Risk Re-assignment) • What risks will buyer assume and what risks does supplier assume for each negotiation point? These are only a few areas where risks may shift.  Supplier’s financial viability  Warranties  Buyer’s needs  Security and confidentiality  Project schedule  Indemnification or liability • Project budget  Performance expectations

25. Warranties – Supplier Promises • Warranties/warranty services should always be free, but are normally built into supplier pricing. • Maintenance support starts when the warranty period is over. • Suppliers generally prefer to disclaim all implied warranties of merchantability and fitness for purpose in favor of specific repair or replace warranties that give little or no recourse to the buyer. To protect the buyer: • reinstate implied warranties or avoid supplier’s implied warranty disclaimers by including language that exchanges supplier disclaimers for specific express warranties; such as: “Should such product/solution not perform as warranted, the supplier will be responsible for fixing and repairing the product and if the supplier fails to do so, the agency has the right to (get credit/remedy from the supplier, etc.)” • All express and implied warranties should be clearly stated in the contract.

26. Warranties – Supplier Promises A few express warranties: • Supplier has the right to enter into the contract and to perform its obligations (or provide the products and/or services or software) under the contract. • The product and all enhancements (and new versions for software) will contain no known defects. • Supplier’s software, services or products shall not infringe on any third party’s intellectual property rights, including, but not limited to patent, trademark, copyright or trade secret. • The supplier is not currently the subject of any litigation or pending claim that would materially affect the supplier’s ability to perform. • Unless approved in advance by agency, no information supplier discloses to agency in providing the services that are the subject matter of the agreement will be confidential to supplier or any third party. • The contract is its legal, valid and binding obligation. • For software: The supplier, if a licensor, has the right to grant a license to the software free and clear of any liens and encumbrances. And many more . . .

27. Warranties – Supplier Promises IT Procurement Manual: BUY IT Chapter 25, IT Contract Formation, includes more critical express warranties for software procurements, as well as warranty discussion/tips usable for all procurement categories. Chapter 26, Negotiating IT Contracts, provides additional best practices that can be adopted for most procurement categories.

28. Negotiating Performance Criteria — Service Level Agreements • How are buyer’s baseline performance goals and metrics in the RFP affected by other or ancillary negotiations? For instance, the RFP’s performance criteria or SLAs may have included: • Desired technical, functional and business outcomes • Defined performance objectives and timeframes • Performance incentives, retainage • Percent of time services should be available • Number of users to be supported • Performance benchmarks, usage statistics • Schedule for advanced notification of system changes, upgrades, downtime • Help desk response time • Is what was important to your original performance needs affected by other negotiation points? • Is it necessary to change who will capture data, who will analyze/report data or, how frequently? How does this affect pricing, staff availability, etc.? • Do the incentives or corrective actions need to change? IT Procurement Manual: BUY IT Chapter 21 includes more PBC/SLA discussion/tips usable for all procurement categories

29. It’s Give and Take, Nothing is for Free In the end strive for: • A balanced contract where neither party must assume unhealthy risks • A clear agreement that documents the business relationship (a 4-corners contract) • Meaningful service levels or performance criteria tied to business performance • Strong warranties with business remedies • Significant attention to Intellectual Property rights, if any • Contract commitments tied to the procurement category: Solution: the overall solution not the products, services or components that make it up Services: deliverables that meet the requirements, not how the services are accomplished Products: supportability, upgrade and maintenance Maintenance: the annual cost increase; service levels that support business continuity • Satisfaction with the Total Cost of Ownership at the end of negotiations What is .com http://searchdatacenter.techtarget.com/sDefinition/0,,sid80_gci342316,00.html

30. WRAP-UP Strategy Planning & Preparation Before your team walks into negotiations, you should have: Completed your market research Established the vision & objectives Developed MDOs, LAAs, BATNAs and assess other party’s MDOs, LAAs, BATNAs Identified and evaluated options/alternatives Developed scripted messages for negotiation & develop roles of team members Planned the sequence and timing of negotiations Assessment & Allocation of Risk Maintain a balanced project Reallocate risks fairly Develop meaningful service levels or performance criteria that tie to business performance Negotiate strong warranties with strong business remedies Ensure the final contract is a “Win-Win” for both parties

31. QUESTIONS? THANK YOU Send other questions to: SCMPolicy&Compliance@vita.virginia.gov VITA Supply Chain Management website: http://www.vita.virginia.gov/scm/