The Trouble with Value

A recent Computerworld article covered a study done by the Harvard Medical School about the value of computerization in US hospitals.  The article led with the headline: “Computers don’t save hospitals money”.  This is not good news if you’re a seller of Information Technology solutions.

First tip: Be prepared1. You can expect to hear about this, certainly if you are selling in the health industry, but generally if you are selling the value of Information Technology to people who either have trouble believing in the value of IT, or for whom it is disadvantageous to admit it (for example, buyers in procurement roles).  The article will be used in attempts to undermine your value arguments, and thereby reduce your prices. Read more

Principled Concession™ Poll – K&R’s Answers

Our thanks to those of you who voted in our latest poll, “Which of the following is a Principled Concession™?”  For those who need some reading on the definition, see our article here or the full list of our articles about this topic here. Without further delay, our answers:

“Why don’t we split the difference?” As of the date of this posting, no one chose this answer. That’s good, because this is not principled. “Split the difference” can be characterized as a way to make both parties equally unhappy. Since neither has a good reason for the split, each is likely to go away thinking they could have (or should have) gotten more.  The technique often works because it appeals to our sense of fairness.

“You can have 5% off if you buy today.” 5% of our voters picked this one. This is most commonly heard in the technology business near the end of a quarter or year.  It is not principled.  In fact, instead of encouraging a sale today, it encourages waiting until the deadline (e.g. end-of-quarter), to see if the deal gets better.  If there is no compelling reason to buy now, savvy buyers will wait until the next quarter – for an even better deal!

“You can have 5% off if you buy today for delivery next week.” This one is closer, but  it is not a principled concession. It got 35% of the votes.  Why?  Most people recognize that there is a trade here – you pay less, but delivery is later. Presumably, if you wait until next week, you pay full price. Why isn’t it a Principled Concession™? Because it makes no direct connection to the buyer’s business value.  There is no stated loss of benefit that comes with waiting.  So in this case, a buyer who acts should accept both the discount and the delivery delay.  It would be Principled if it were in this form: “You can have 5% off if you buy today for delivery next week.  However, you will not be able to get the (benefit which is obtained through use) until next week, and that will mean (loss of benefit). Sample benefit/loss pairs might include such things as public visibility for an advertisement and the loss of sales, or use of your new car and the need to pay for public transportation in the meantime.  Note that benefit/loss pairs can also be put positively as benefit/gain pairs. For example, if you pay the full price today, your advertising will run now, and you can expect 12 additional sales before next week.

“You can have 5% off if you buy 10.” Only 2% of  our voters went for this one. There is no trade, and there is no explicit value to the buyer.  For the seller, it is nice to reduce the cost per sale, but that is value to the seller.  If we said, “You can have 5% off if you buy 10, which saves me marketing expense which I can use to reduce your price, and you get the benefit of 10 deployments instead of 1, which means that you will accrue (benefit)…”, it would be Principled.

“We give 5% off on days that end in “y” – like today!” Not Principled, and fortunately no one thinks that it is.

“None of them.” Well, 60% of our voters understood that none of the choices follow the Principled Concession™ format described in the article. We hope that they also recognize that unprincipled concessions not only accomplish nothing, but often delay decisions.  The real test is not how you voted, but what you will do in your negotiations.  Our hope is that you will only make Principled Concessions™.  (td)

T-Mobile Credibility and Leverage… Again

You may recall our October article about T-Mobile’s Sidekick user data loss problem, or may have read some of the 25 or 26 million references available via a search for “T-Mobile data loss”. It is a simple, real-world example of how loss of credibility can hurt your business.

T-Mobile’s public statements allow us to make some estimate of the business value of this temporary service loss, and the  long-term credibility loss that goes with it.  Add these up:

  • The estimated cost of lost business in sales of Sidekicks and the far larger long-term loss from sales of service plans when T-Mobile temporarily suspended sales of the Sidekick after the outage.
  • The cost of the $100 “service vouchers” that were offered to users inconvenienced or impacted by the outage.
  • The 14% price reduction that T-Mobile has made to the price of the Sidekick LX model ($175 to $150), now that sales have been restarted.

It’s a big deal.  Next time your credibility is on the line, remember what’s at stake, and protect it.  How quickly you respond, and how effective you are, can add up to a lot.  (td)

More on Lose Credibility, Lose Leverage

Well, after last week’s “Lose Credibility, Lose Leverage” story about T-Mobile, Microsoft and the Sidekick, we can barely keep up.  Hitting the news this week: Microsoft and T-Mobile recover (sort of), IBM and the state of Indiana, “Balloon boy”, Raj Rajaratnam arrested, Energy Star© appliances that are not actually more efficient…

Where will it all end?  Google those, and get the scoop.  All of these fall into a fundamental category of credibility and the impact credibility has on leverage.  Will Rogers said, “Rumor travels faster, but it don’t stay put as long as truth.”  There is plenty of opportunity in the interim to feel pain, and if the rumor and truth coincide, the long-term outlook can be grim.  Preserve your credibility. (td)

Lose Credibility, Lose Leverage – Another real-life example

Well, we hope you didn’t have to read this, “Sidekick customers, during this service disruption, please DO NOT remove your battery, reset your Sidekick, or allow it to lose power.”  That’s the message from T-Mobile and the Sidekick data services provider after a reported “cloud computing” failure, which is expected to cause clients to lose their contacts, calendar entries, and photos.

We now have the latest in a long line of real-life “credibility and leverage” scenarios.  T-Mobile is scrambling to regain credibility and the satisfaction of T-mobile clients.  As part of that scramble, they have offered credits to affected clients.

You may expect to see their competition start advertising something like this: “Your personal information is safe on your phone, and is backed up when you use our service.”  Lose credibility, lose leverage.  The fallout will probably come at contract renewal time for those customers who were hit, who have to decide: Renew, or move to a new carrier?  (td)

Subcontractor Negotiations Foil Penske Bid to Save Saturn

By now most of you have heard that the Penske Automotive deal to save Saturn fell apart.  (See page 1 of the Wall Street Journal, for example)  The reason given is that Penske failed to secure a commitment from a third party to manufacture cars for sale under the Saturn name.  GM has guaranteed to do so for 2 years, but the issue was what happens after that.

Penske was negotiating with Renault to be that supplier two years from now.  But Renault balked at the plan.  In our opinion, this was a good business decision by Penske.  Too often the requirement of a subcontract relationship to make a deal happen is left for later, especially if it seems that there is time to secure the subcontract.  But the risk does not go down just because there is more time.  In fact, as in this case, the risk can increase as potential car buyers hesitate because of the uncertainty.

What do you think?  (mk)

Cash for Clunkers – Part 2

In our recent “Cash for Clunkers” post, we discussed leverage in government car purchase incentive programs.  One question we posed was: “who has more leverage – the salesperson or the buyer?”  We thought the buyer had more leverage, feeling that it was easier for them to walk away given how long they had already owned a clunker. (You just get used to some things.)  We used this example in a recent K&R Negotiations Workshop, and heard a different view from someone who had experience with the program as a buyer.  He told us that at the car dealership he used, they were so busy that if you didn’t get “in the queue” early (days early!) you weren’t going to get processed before the program expired.  He told us that he waited over 3 hours to see the financing manager.  (As a side note – this is our least favorite, most time-wasting part of any car purchase.)

What do we learn from this?

First, guidelines are guidelines.  One key difference between successful sales and unsuccessful ones is that the people who succeed take guidance and determine if the general rule applies to their specific case.  For our clunkers program buyer, the rule did not apply.  (Or, not to go out on a limb here, the rule was wrong.)

Second, rather than being wrong, we suspect that the rule is just too complex to simplify as much as we did.  Many buyers could walk away – in those cases, they had the power of leverage.  But if the flood of buyers was strong at a particular dealership, their power was significantly reduced.  Leverage can shift during a negotiation.

Third, understand the concept of leverage, and know your situation.  We often say in workshops that we teach methods, not judgment.  Methods applied blindly don’t get it done.  If you are selling, you have to know the method, know your client, and know yourself.  Using the K&R Negotiation Method™ will improve your negotiation results. (td)

Cash for Clunkers: Some Simple Lessons in Timing and Value

If you live in Spain, Germany, France, Italy or the United States, or are following the automotive or economic news, you are probably aware of the government programs commonly referred to as “Cash for Clunkers”.  If you aren’t aware, here’s a simple view of how they work. Individuals that own older (but not too old) autos which get relatively poor fuel economy are encouraged to trade their car in for a new, more fuel efficient one.  The encouragement is in the form of a (presumably) inflated trade-in value paid directly by the government to the seller.  Buyers immediately get the benefit of the difference between the actual trade-in value of the auto and the government payment.  Over time, buyers and the environment both benefit from the improved economy of operation and reduced emissions of the new auto.  At least that’s the theory.  Public policy is outside our scope in “Negotiation and the News”, but these programs provide some simple lessons in negotiation timing and value.  Let’s use the program in the United States as an example, since it recently ended. I’m calling it “CFC” for short.

In the US, CFC went “live” on July 27th and, to qualify for the “encouraging” payment, the final paperwork was to have been completed by 8PM on August 24th.  Let’s look at some exercises in value and timing.  For simplicity, assume that any ownership transfer costs are always $0, and that we ignore any time value of money.

Lesson one: If we assume that the paperwork took an hour, and that backdating did not happen (bad assumption?), when did the last sale take place under this program?

  • Easy, right? 7PM, August 24th. Everybody gets this one. We can all see that the incentive disappears at that time, so sales under the program stop.

Lesson two: What happened to the value of a qualifying “clunker” auto on July 27th?

  • It became the greater of the actual trade-in value or the government payment.  Everybody gets it again. If the clunker’s trade-in value was $1000, but the incentive value was $4500, that $4500 can be “spent” on a new car in the same way the trade-in value could have been.  If the clunker’s trade-in value was already $6000, that value remained unchanged.

Lesson three: On what date did the clunker actually become worth the value of the government payment (assuming that the government payment was higher than the actual trade-in value)?

  • This one is a little harder, and a little less clear. Certainly the value changed on the day the program was approved, in anticipation of the actual start date.  The value probably moved upward as passage of the bill became more certain, and reached the incentive payment point at the moment passage happened.  If the bill had moved toward passage, and then away, the value would have slightly fluctuated in response to the uncertainty of the possible “reward”.

Lesson four: If a clunker-owner was interested in a new car, and was induced by the CFC program to walk into a car dealership at 5PM on August 24th, who was under more pressure to close the deal by 7PM?  The salesperson or the owner?

  • Tough one.  If you said the clunker-owner, we understand why.  The value of the car drops in 2 hours.  And of course, like all negotiation cases, it depends.  It depends on the salesperson’s quota, available new cars, and a bunch of other things.  But my vote is for the pressure to be on the salesperson.  Here’s the logic: the buyer lived with a clunker for a long time without acting.  They also waited until the last minute to look at closing the deal.  A buyer like this can make the transition back to the position they have been in for a long time fairly easily.  The seller recognizes that this is a one-time, short-term opportunity, and stability (which means the buyer is not buying) will set in again in a hurry.  The seller is under more pressure.  Now, whether the parties act like they recognize who is under greater pressure is a different question…

Here are the negotiation conclusions to take into your everyday negotiations:

  1. Value changes over time (or should):  If what you are selling or buying has value, that value is most likely not constant.  You should consider how the passage of time influences value.  Remember that in the CFC example we are dealing with a tangible commodity, and the value is more or less expressed by price.  In complex technology sales, value is often determined by business usage, and the price should be related to, but not equated to value.
  2. Decision-making is linked to time:  Remember the Y2K panic over potential computer program failures?  Relatively speaking, how many Y2K solutions were put in place in 2000 as opposed to the years approaching the end of 1999?  You should consider how time influences the decision-making process.  Regulatory dates, time to deploy (or fill out a form) and other factors will sometimes determine IF an agreement will happen.
  3. Things expire:  Sometimes the decision process can drag on forever.  And sometimes if you miss the expiration date, the opportunity is gone.
  4. Leverage Shifts: Where does the pressure and negotiating power exist – with which party?  It is variable, and influences each side to a different degree.  Think about who is under what pressure as you proceed, and how it might shift over time.

K&R is expert in the issues of why and when transactions close.  We call it “Negotiation Forensics”. Ask us about it.

K&R Success Stories Published

K&R Negotiation Associates has published a few representative success stories on the K&R Web Site.  Here are excerpts and links to more information:

  • K&R’s client turned a $150K annual loss into a $50K annual profit, while at the same time raising their own client’s satisfaction with the service. (more)
  • K&R’s client realized 6.7M€ of revenue in their current fiscal year, and 60.2M€ additional revenue within two years. (more)
  • K&R’s client benefited between $13.5K and $250K. The ultimate buyer saw a clear ROI from the total $837K investment in our Client’s products. Both our client and our client’s client were rewarded through the application of K&R negotiation principles. (more)
  • K&R’s client did not offer expensive guarantees and rebates as part of their services package. This will positively affect profitability as the agreement executes. The result was generated by carefully understanding client needs before offers were made. (more)
  • K&R’s client closed $2M higher than expected, using a few simple K&R principles. (more)
  • K&R’s client benefited by up to $65K, and began the process of breaking a pattern of discounting with their client, which will repeat in every transaction. Our client’s client was satisfied, because they understood the value of what they were buying. (more)
  • K&R’s client closed for $1.6 to 2.1M more than they expected to, using K&R’s value principles. (more)

Technology Buyers and “Advance Fee Fraud”

First – we’re not really writing that technology buyers are defrauding sellers – so don’t send nasty letters.  But there is a common technique that buyers use that has a parallel to the infamous Advance Fee Fraud, and which provides a negotiation lesson for sellers.

An Advance Fee Fraud, also known as a “Nigerian letter” scam, or a 419 scam (named after the part of the Nigerian criminal code that deals with fraud), or a bunch of other names, is not unique to Nigeria.  Perhaps you have received the email…




In case you have received a version of this, take our advice – throw it away.

The fraud plays out as follows: in order to release and share in a large sum of money, you have to send either “good faith” payments or payments which allow the processing of the funds.  As you might expect, the flow of money is one-way:  from you to the scammer. The victims’ losses for the 419 scam in 2005 were estimated to be over $3 Billion worldwide.

How does this relate to technology buyers?

Example #1: The buyer says, “In order for me to be confident in your product, we need you to do a proof of concept (POC) at my location.  That will help me understand if the benefits that you projected are real.”  Many times, the seller confidently proceeds down the POC path, spending money and proving that what they said would happen does, in fact, happen.  What next?  The buyer decides there are other issues, and still doesn’t sign. The seller has laid out money in anticipation of a future benefit, which does not accrue.  It’s an Advance Fee Fraud.

Example #2: Seller and buyer are in heavy negotiations for a product or solution.  Near the end of the negotiation, the seller says, “Look, I have a lot of future business coming.  If you give me a great price on this agreement, you’ll be the front-runner for the big one coming up.” If the seller believes it, most times conditions will change by the time the “future business” comes up, and the negotiation will start from scratch. An Advance Fee Fraud.

We are willing to concede that this is not always a scam.  Sometimes “good faith” means “good faith”, not a guarantee.  But the error the seller might make in each of these cases is the same, and it parallels the Advance Fee Fraud.  The seller advances something, for the future promise of a big return.  As experienced negotiators, we know that the big return often fades away instead of getting delivered.

What to do?  As a seller, make sure that your return is assured before you advance that “first payment”.

In the case of a POC, agree on two things with the buyer up front:

1.    Successful results from the POC will result in a signed order.

2.    The terms of that order.

In the case of “big future business”, consider responding like this, “We are interested in the future business.  If you would like to agree to do all of that business with me now, your terms will reflect the size of the agreement.  If you choose to do a smaller agreement now, your terms will also reflect the size of the (smaller) agreement.”

Don’t fall for “Advance Fee Fraud” from your buyer.  Make sure that there is a real future return before you make an investment. (td)