News Feature

Vendor Negotiation: Squeeze Now, Pay Later

By Michael Schrage

July 15, 2003 — CIO — If you’re a corporate CIO, you care enormously about your company’s profitability. But how much should you really care about your supplier’s profitability? Here’s an original idea: If you want to dramatically cut your costs, dramatically cut their profits. This is a buyer’s market. Go for it.

That insight was inspired by a recent front-page profile in The Wall Street Journal about a cost-cutting telco CIO with a python’s flair for squeezing his suppliers. Need a router or a RAID? Verizon’s CIO encourages his people to check on eBay to price boxes before their vendor negotiations.

"It’s as if you now have a stock market for servers," he gushed. He’s also launched an "Offware" program that invites software vendors to present discount-licensing schedules to "off" their business rivals. He told HP, IBM and Sun that their share of Verizon’s spending would depend on how low their prices were. "All three immediately lowered their prices 25 percent. Then Sun and HP decided to slash maintenance charges," the Journal reported.

But wait! There’s more—or less, actually. At a meeting where one of his direct reports insisted that the company "did such a phenomenal job of vendor-squeezing in 2002 that there’s not much more to squeeze," the CIO bluntly responded: "See how much you can push things."

There are two ways to read this piece of news: The first is a fist-pumping, "Yes! What goes around, comes around, and we need the savings." The second is, "Wow, I wonder what happens after the deal gets signed." This column is about the second reaction. After all, CIOs don’t merely procure information technologies. They have to implement them.

There’s nothing illegal or immoral about squeezing suppliers. It can be an excellent business practice. But it defies human nature to believe that a vendor that has been low-balled, dropped to its knees and capitulated to even the most bizarre buyer demands in a bid to get the business won’t be constantly on the lookout for ways to make its money back. There is a point where the perceived sense of economic fairness is violated. That’s the point at which the extra squeeze creates dangerously false economies. Penny-wise, pound foolish.

I know one company that put the screws to a vulnerable supplier—a network vendor that, in fact, had consistently gone the extra mile in customer support even during the apex of the telecom bubble economy—and renegotiated prices down by one-third. The vendor literally begged to limit the price cuts to 25 percent. The customer declined. The desperate vendor caved. But customer support is now largely e-mailed attachments of technical manual excerpts and hotlinks to relevant FAQs. Crises are handled within 48 hours instead of an afternoon. The two companies hate each other. A friend who works with the customer CIO confided that all of their hard dollar savings had vanished within 100 days of the renegotiation.