As organizations shift their focus from delivering technology to realizing ROI from effective use of technology, they need to change the nature of their relationship with vendors.  Most organizations today treat vendors in a transaction orientated approach.  The vendor sells a product or service, the client buys it, and the transaction is complete.  The problem is merely buying the product or service does not align the vendor’s interests or behavior with the organization's goals of maximizing ROI.  Organizations need to shift their vendor relationship from transactional to performance based in order to align vendor behavior with the buyers’ goals.  

 A transaction based approach is by its very nature adversarial.  The vendor tries to maximize revenue through selling as much as possible, at the highest price possible.  The client organization is out to minimize its costs and it tries get as much as possible for the lowest price possible. However, no where in this dynamic does the vendor have a stake in ensuring the client’s success.  The vendor sells a product, the client buys it.  Wouldn’t it be better if instead the vendor sells the ROI from use of the product?  What would happen if the vendors had a serious stake in ensuring their clients’ achieve success with their products?

 Vendors have a very direct impact on the overall ROI a client experiences, yet they typically do not have a direct stake in maximizing clients’ ROI.  This has to stop.  Organizations need to shift vendor relations to a shared risk/shared reward model where the vendor has a very significant interest in ensuring the client maximizes ROI.  In return, when the client organization meets or exceeds its ROI objectives, it needs to share some of the benefits with its vendors.  Ideally, the relationship will evolve from transaction vendor-client to more of a strategic partnership or joint venture.  Sounds great, right?  But how do we do this?  Where do we even begin?  Engaging in performance based contracts is a good start.

 My first job out of college was working as a Contract Specialist for the US Government.  While there are many jokes about $400 toilet seats and other great gaffs in government contracting, there are several great lessons for how organizations should change vendor relationships to improve their ROI.  First, vendors are entitled to receive a fair and reasonable profit.  Contract negotiations are not about beating your vendor into submission.  Second, everything is negotiable!  Either party can propose unique terms and conditions.  You don’t need to just accept vendors’ typical contract and pricing practices.  Don’t be afraid to propose wildly new and different options for creatively structuring a deal.  Third, there are many different types of contracts and you need to select the most appropriate contract vehicle that will deliver the results you desire.  

 So, how can this work?   Most technology vendors get revenue based on license fees, consulting services, support contracts, employee training, and similar products.  This model encourages them to push the client to buy products or services they really don’t need.  Instead, clients should push for unique alternatives that could align buyer and seller behavior.  For example, vendors and clients can adopt a pricing approach similar to the “base plus commission” salary model used to compensate many sales representatives.  In such an approach, vendors and clients jointly define and agree to ROI metrics and targets.  The vendor then charges the client a low “base” fee.  Once the client achieves the agreed to ROI the client would pay additional compensation, an ROI “commission”, to the vendor.  This ROI commission is based on a sliding scale, so the more the clients’ ROI beats the target, the more the client pays the vendor in commission.  This is a great win-win!

 There are many other options available to you.  You can structure deals to include incentives and penalties that encourage software vendors to only sell licenses for functionality and seats that are actually used by the client, thus reducing wasted expenditures on licensing functionality that is never implemented.  You can create consulting contracts to drive effective user adoption and ROI, and not just delivering the system on-time and on-budget.  Can you think of other ways you can structure vendor relations to better align yourself with vendors?

 Changing the nature of vendor relationships is challenging, but it has the potential to deliver great rewards to both the client and vendor.  Clients maximize their ROI.  Vendors increase proven client success, which leads to additional sales.  Still, there are many operational challenges with changing vendor relationships.  I will discuss these in future blog entries, so I encourage you to check back here often.

 In closing, it is obvious that the specifics of any such deal are based on your unique needs. The important thing is that you can take a close look at how you manage vendors and determine how you can better align your vendor relationships to improve ROI on your technology projects.  You need to get creative.  Don’t just accept the old way of doing things.  Some vendors may resist such ideas at first, but if they really want your business they will work with you to find a mutually agreeable solution.  If a vendor absolutely refuses to engage in performance based contracts, you need to ask yourself if you want to do business with an organization that doesn’t think you will benefit from using their products or services. 

 Remember, Everything is Negotiable!