Terms in negotiations cost money; someone pays the tab (bill): This is one of the six foundational principles of K&R Negotiations’ Win Wisely™ method. Every term in contracts and negotiations should be of some value, and each term has an associated cost. As a negotiator, knowing the rationale for a term enables you to articulate the value and identify its cost. The value of the total deal is the aggregate impact of all the terms. If you don’t understand the rationale behind the terms, not only is your credibility impacted, but so is your leverage. The following story illustrates this principle in action.
Gene, a sales rep for a technology solution provider, is trying to sell support services for a client’s e-services distribution infrastructure. The client is a multimedia lifestyle content distributor. A new contract for $4M is on the table.
When the technical sales team is performing a proof of concept on the customer site, they discover that the customer has violated the license terms for their existing software. There are 2500 active users, far above the licensed ceiling of 1000. Fees owed under the current licensing agreement amount to $500K with additional maintenance charges of $90K/year. When Gene brings up the license violation, the client informs him that they expect the fees to be waived if Gene’s company wants to win any additional business. Gene has a meeting with Irene, the client’s business user, and David from the client’s procurement team. The following conversation transpires:
“First of all, I want the issue around the extra 1,500 users off the table,” says David. “It’s ridiculous. You wouldn’t have even known unless we invited you in.”
“But the violation of license is clear,” says Gene. “If the software were not valuable to your staff, you would not have 2500 users.”
David: “Well, it still comes down to this: Do you want the new contract or not?”
“Of course we do,” Gene replies. “But we want to do the business on the basis of a principled agreement. If we didn’t, we wouldn’t be the kind of company that you would want to do business with at all.”
“But the additional usage isn’t costing you anything. After all, this is software, and your incremental per user cost is nearly zero,” says David.
Gene: “David, software isn’t free. Wouldn’t you be upset if your media content was distributed to an extra 1500 people without any payments?”
“Maybe so,” David says. “But the fact is that you have provided no additional value to us since the day we licensed the product.”
“Let’s get back to the original agreement,” Gene says, turning to David’s line of business colleague, Irene. “The original license was intended to make 1000 of your people more productive by enabling them to deliver content more quickly to their audience. Each user generates approximately 20% more revenue as a result – this is more than 10 million dollars annually. That value has been increased by extending it to an additional 1500 users – those users agree with this, and have been telling us that. Installing our software was a great business decision for you. But it has to be based on mutual benefit; we are entitled to payment. If you pay for what you’re using plus maintenance, it will allow you to continue to accrue that expanded benefit, plus guarantee you the support you need going forward.”
“Well,” Irene remarks. “We didn’t even know this many people were using it.”
“If that’s the case, we can help you better understand and control your usage with a license manager product,” offers Gene. “We will provide and install it at no additional charge. You can monitor and manage your license compliance. With the focus on compliance these days, we’re sure that you will benefit.”
“That’s interesting, but help me here, Gene,” says Irene after thinking for a moment. “We would like to be in compliance, but I’m not prepared to take a $500K hit to our budget.”
Gene replies, “I understand. As I see it now, there are at least four basic alternatives. The first, and least desirable for everyone, is that you stop using the product with the expanded service and users. But I’m concerned about what that would mean for your revenue. Second, we could work out a payment plan for the additional licenses. Third, we could use some financing options to push those payments into the future…”
“Wait, wait,” says Irene. “Those options are mostly payments. Isn’t there another way? I still have a budget issue.”
“Of course. Option four would be to discuss this in the context of your company’s possible $4 million investment in our technology. If we can get these discussions back on track and get your commitment for the additional business, I may have the latitude to get some adjustment on the fees that are due.” Gene paused.
“What kind of adjustment?” asks Irene.
“For example, we could apply the discounts for the additional order to the money owed. This would assume a commitment on your part.”
“I have to admit. I still don’t like it, but I appreciate your approach,” replies Irene. “We’ll discuss it internally.”
“Thank you both. And remember, you always have the option to limit the use of the software to the terms of the original license.”
When you are negotiating, remember there is no “free lunch.” Gene articulated a quantified impact of the additional usage – which was a change in terms. If you can’t articulate that impact, you are unlikely to get the best possible payment for the change. The aggregate effect of these kinds of changes could ultimately change a profitable deal into an unprofitable one. By recognizing and addressing the issue of license compliance in terms of value, Gene remains at the table, credibility intact and ready to move the conversation forward.