Oh No Mr. Bill! Your Software is Going End-of-Life.

When negotiating, you should be aware of the principle of Negotiation Leverage.  Leverage describes the use of facts, rationale or conditions to move the other party closer to your way of thinking.  Here are some simple examples:

  • Your software is already installed and in production, or your services team has completed 2 phases of a 3 phase implementation project. You have leverage when additional licenses are required for the same task, or when phase 3 of the project starts, because your software or services team is proven, and there is a cost of conversion to move to another alternative.
  • Leverage can be related to time (such as end-of-life). When cars are leased, there is leverage on the buyer (leasing party) to make a decision at the point of the lease expiration (or slightly before). This leverage is created because of the problems related to loss of transportation if the decision is not made before the leased car must be returned. Conversely, there is very little leverage available to convince the buyer to make a decision just a few weeks or months after the lease is first signed. The risk of lost transportation does not exist yet.
  • Value provides leverage. If I can offer you a guarantee of 4% on your money, versus first-half-2008 stock market performance, I can get you to accept an alternative (a “low” return on your money) that in a bull market is unattractive.

From time to time, K&R consults on sales situations that are forecasted to close predicated on the end-of-life or withdrawal from marketing of a software product, and the corresponding lack of availability of standard support services for that product.  In nearly every case, we find that the situation is not as clear as the seller suggests it is (or wants it to be).

Normally, this is what we hear: “Product X is going end-of-life in 180 days. My customer won’t be able to accept the risk of running production systems on it after that date.  The time it takes to convert to my (better) Product Y is 60 days.  So, I am forecasting that we will close the deal on Y in 120 days or less.  This is a sure win.” Think of it as the “Oh No Mr. Bill!”[1] argument.

In nearly every case, this will be insufficient to win the sale.

Here are the flaws:

  • The heart of the “Oh No Mr. Bill!” argument is the fear of catastrophe. The argument presumes that end-of-life means a failure will occur, and that the impact to a production system will be severe. In fact, the opposite is often true. In many cases, an end-of-life product has had additional versions released, all of which the buyer has declined to buy. This likely means that the failure history is acceptable, which is likely to continue. After all, the software doesn’t know about the end-of-life date. The failure history may be acceptable because the work performed is not critical, or because the failures don’t happen. The “Oh No Mr. Bill!” argument confuses what is possible with what is likely.
  • Even if the risk of failure is real, the argument fails to persuasively articulate the risk of that failure. A more effective method to describe it would follow these lines, “If the system fails, you will be unable to register your incoming students on-line for the fall semester. You’ll have to fall back to manual processes. Your expense will rise by $7 million. Your client (student) satisfaction will plummet, and you may lose enrollment.” This argument links failure with the costs and implications of the failure. The implications are described in terms that the client (in this case a university) would find important. Without this sort of description, the seller is assuming the buyer will connect the risks to the consequences by themselves.
  • However, in many cases the argument above will be hard to make. If such failures were occurring with any regularity, and the risks (business impacts) were real, then the likelihood of the client still using the nearly-end-of-life product would be low.

The answer lies in the approaches we have laid out before (see our articles in the “Value” section).  Buyers need to understand the business value of a solution to be motivated to act. Fear-mongering alone (“Oh No Mr. Bill!”) won’t do it.

Not convinced? Let’s take a short look at a relevant real-life example – Windows XP and Vista.

Microsoft’s experience in providing Vista as an upgrade/replacement/whatever for XP has been written about at least 740,000 times according to Google.  We’ll assume that you have read some of those. While not an end-of-life scenario, it is a step in that direction.  Microsoft made value arguments to XP users – they were only modestly effective in driving the conversion to Vista.  Many people weighed stability, conversion cost, breadth of support, mixed platform considerations and more against the added business value of Vista.  Many people stuck with, and continued to install, XP.  Microsoft delayed the end-of-marketing date at least once.  After end-of-marketing, almost every major PC/laptop vendor today offers an “XP downgrade” program for systems that must (by Microsoft’s terms) come preloaded with Vista.  Microsoft has itself described situations to get around its own marketing rules, which allow netbooks and others to continue with XP. One interpretation of this is that they mis-assessed the leverage they had to force buyers to move. Another interpretation is that they tried to force movement to Vista with an artificial “expiration date”, not with business value.

Don’t make the same mistake – look beyond “Oh No Mr. Bill!” when you are trying to close a sale. (td)

[1] Mr. Bill is the clay figurine star of a series of short subjects shown from 1976 to 1980 on Saturday Night Live (SNL). The “Mr. Bill Show” was a parody of children’s shows.

Monopoly Value, or Not?

K&R believes (and teaches) that you should understand your “leverage position” in a negotiation.  As a seller, the worst position you can have (in terms of the price you can get) is to be a commodity, the best is to be a monopoly.  As a buyer, you will get your best prices and terms when buying commodities, your worst when buying from sellers who have a monopoly position.  The primary criteria in most cases is “will the purchase satisfy the business need?”  Once that criterion is met, the number of available, suitable solutions directly influences the price.  What (arguable) monopolist is being moved down the leverage slope this month?

Monopoly power allows the party who holds it to do things that their client base doesn’t like.  A simple, current example: Microsoft announced some time ago that Windows XP would no longer be available for retail sale (or sale with new computers) after June 30, 2008.  The user base is not so happy about this, as the Microsoft alternative (Vista, in its various forms) has significant issues of support, and requires more expensive systems to run it effectively.  Petitions and user outcry had no impact on the decision.  After all, as pretty much a monopoly in this market space, who can stop them? (Please don’t send us any Apple objections; this article is not about that.) However…

Enter the OLPC, ASUS Eee PC and others.  Sales are booming, and prices are low.  An entry Eee PC sells for $299.  The OEM price of a copy of Windows XP is rumored to be $120.  The original Eee ran Linux, not Windows.  Windows wasn’t affordable.  The buyers decided that a Linux solution “satisfied the business need.”  The popularity of these machines and the unpopularity of Microsoft’s position combined to break the monopoly pricing position.  As of now, Microsoft is apparently willing to again offer Windows XP to OEMs of similar machines, at a price of about $40, until June 30, 2010.

Realistic alternatives for buyers can have a tremendous impact on prices and negotiating positions (such as dates of sale).  A 67% price drop is a big one.  For Microsoft to hold their price, they needed to convince the buyers that there was something they would get from Windows that they could not get from Linux – they failed at that.

As a buyer – remember that your best friend in a negotiation is a set of realistic, competitive options.  As a seller – remember that your price is driven by your ability to convincingly portray your solution as “the only one that can do the job”.  The struggle over position on the leverage slope is the real negotiation – if you win that struggle, the pricing discussions will be more rewarding for your side. (TD)

BEA and Oracle (Part 3)

When last we looked, BEA had asked for $21/share, Oracle had offered $17, and key shareholder Carl Icahn was threatening the BEA board with a lawsuit to force action on the offer.  Now everyone is in agreement at $19.375.  What happened?  It’s negotiation leverage and the Negotiation Success Range™ (NSR™) in action.

Disclaimer: we know nothing from the inside. We just read the news, and view it with an expert negotiator’s perspective.

First, some background: BEA needed to restate earnings for 3 fiscal years as a result of an “options problem” and their stock mostly lingered below $15 for five years.  Oracle made an offer to buy BEA for $17/share.  BEA countered with $21.  Icahn said the company should be auctioned and he would take the decision to the shareholders, with or without BEA board cooperation.  In our last BEA/Oracle article, we discussed the concept of the NSR™, and how these positions and actions may have been used to either establish the price range for discussions, or be an attempt to shut them down.  Without inside knowledge, we can only suggest alternative interpretations.  In most negotiations, this is the case — the parties involved have different sets of information and different motivations — no one knows the thoughts of both sides. (And we don’t know the private thoughts of either side.)  That’s why they call it “negotiating”.

What did BEA do?  Made a deal with Icahn to show him the books, so that he would be more supportive of the higher price.  Subsequently, they got him to agree to actually delay their shareholder meeting by a month, and drop his lawsuit.  This removed Oracle’s leverage to use a member of the BEA “team” (Icahn) to pressure the BEA board to accept the lower offer.  Next, they announced significant profit growth (on slightly declining revenue), bolstering their argument that $17 was not enough.  Finally, in either a response to an approach from BEA, or for another reason, HP said they had “no interest” in acquiring BEA.  This weakened BEA’s position, since it removed HP as a “bidding competitor” against Oracle.  As an interesting side note, HP may have made the statement because of unrelated motivations.  While they have a relationship with BEA, they also have similar relationships with other vendors who compete with BEA.  One result of the HP announcement could be to calm the fears of HP’s other partners that they might be disadvantaged if HP bought BEA.  It is often the case in negotiations that the actions of the parties are driven by unrelated motivations.

Back to BEA.  Having competitive bidders does not change the value of BEA.  However, BEA is valuable in different ways to different bidders.  So, Icahn’s desire to have an “auction” will generally work to raise the price – if there are willing bidders.  One mistake BEA apparently avoided – publicly, they never said, “Well, if not $21, how about $19.95?”  This could be a signal that they lacked confidence in their position.  And, unless they give a business reason for the change, the discussion changes from a negotiation to “haggling”.  The way out of this is to change your position with a business rationale.  For example: “Our revenue and profit projections were being revised , and we didn’t want to err on the low side.  Based on our released projections, we believe that $19.95 is a fair price.” That is an example of a Principled Concession™ — one related to business value.

What did Oracle do? October: offered $17. November: we are “happy to pay” $17.  Later in November: “we will no longer pay” $17. December: Oracle’s CFO says, “no friendly deal can be done with the current BEA board at a price and terms acceptable” to Oracle. January: the gavel bangs at $19.375.  There are several lessons here.  First, the CFO may have hurt his personal credibility and Oracle’s credibility.  Why?  Because his public positions about the “fair price” didn’t match the end result.  This may have been a considered strategy – testing the resolve of the BEA board.  Good negotiators may do such things.  We only suggest that the decision to take strong public positions and then alter them should be done with the implications and risks in mind.  (Remember this if Oracle makes an offer for your company.)  If BEA had rushed down to $17 through lack of confidence, it would have been seen entirely differently.  An alternative approach would have been to say, “I am very pessimistic that a friendly deal can be done (and so on).” It leaves room for a change in position.  There is both art and science to negotiations.

What does all this demonstrate?  Negotiating is often complicated, but some principles apply again and again:  K&R’s NSR™, the concept of negotiating leverage, the use of Principled Concessions™ when you change your price or terms, the importance of your credibility as a long-term asset, and bringing your team together.  The result for BEA was a 14% improvement in the offer price within 90 days — that’s a pretty good ROI. (TD)

How Expensive is a Public Embarrassment?

Suppose you are a toy manufacturer located in China.  The news is full of stories of contaminated toys.  Plenty of unfounded rumors are tagging along.  One of your key customers is re-negotiating a contract that is important to you, and price (as always) is an issue.  Your customer raises the quality concerns.  The customer talks about the massive financial risks of a public outcry, involving the “health of our most helpless citizens, the children” (as the press would say).  Your relationship has always been good.  None of these problems have been yours.  In the end, the customer asks for a lower price, “to provide additional protection”.  You know that you have the ability to cut the price – there is enough margin in this particular transaction.  What now?

This is an example of a customer using the public embarrassment as leverage in a negotiation.  Their story is plausible, “I must protect myself from this additional risk.”  They know you want the business.  It’s just one example of leverage in action.

A good negotiator will always ask the question, “What problem are we trying to solve?”  In the case above, the problem is not, in fact, money.  The problem is risk – and worse than that, it isn’t even risk that relates to your own performance.  It’s someone else’s risk, passed on to you by association.

One approach is this.  Tell your customer that you understand the risk involved is tremendous for them – while reminding them that your performance has been exemplary.  Offer to add additional risk-related actions to your contract – inspections or an outside audit – whatever it takes to make them feel secure.  Then raise your price – because risk-abatement is not free, and because it has value to the client.  Let the customer decide if the additional actions are worth the price.  In this way, you will uncover the truth.  Was this just a tactic to get a better price, or was the problem a real one, but one which is solved in a different way than the customer proposed?  Either way, your negotiation position is improved, because your knowledge is better.  Plus, you may actually improve your contract position, rather than cut your margin.  It’s Wise Negotiating.  (TD)

Toray Industries (Japan) and Boeing

How do you act when you are the incumbent?  In a Bloomberg.com article, Boeing is reported to be in talks with Japan’s Toray Industries regarding a possible 40% increase in Boeing’s orders for carbon fiber reinforced materials.  The materials are used in building the Boeing 787 airplane, and are Toray’s most profitable line of business.  This is how the discussions might go…

Boeing: “With our order size increase, you should realize the economies of scale and have reduced manufacturing costs.  This should result in a lower unit price for us.”

Toray: “Our materials are the finest available for your use.  A single-source solution will reduce your build complexity, help your time to market, and accelerate your revenue for this new airplane.”

Toray’s incumbency with Boeing is a powerful, but two-sided position.  Your best clients are often your most demanding ones, and the ones who remind you of your “partnership”.  But discounting to retain the business that you originally won through product and service excellence is a risky negotiating choice.  If you don’t “hold the line” on your price when you have an advantage, you will never be able to hold the line on price.

Incumbency provides negotiating leverage.  When this leverage is used with arrogance, it will drive your client to find an alternative supplier.  But when this leverage is not used at all, it will erode your business now, and going forward to the next transaction.  Use your leverage wisely. (TD)