How can I beat my suppliers' price rises?

I accept that my suppliers' costs and fees will go up over time. Therefore, I am trying to agree a roadmap for the price rises to...

I accept that my suppliers' costs and fees will go up over time. Therefore, I am trying to agree a roadmap for the price rises to tie them to a tangible increase in service and value. Can the panel advise me on any suitable strategies?

You may need to pay more for a customised contract

David Hughes, Deloitte and Touche

The duration of the contract, the service levels and the financial penalties all have an impact on your bargaining powers. However, if you sign up to a long-term contract you can partly mitigate the risk of rising costs.

Long-term service contracts often provide fixed services for a reducing annual fee. Some suppliers will even perform first year services at a loss, as they consider this an "investment in the relationship".

You could arrange to have a fixed payment for core services and additional payments on a supplementary contractual basis. The fixed payment should prove to be cost-effective as the supplier is "on a promise" for future work. These supplementary contracts can be a fixed fee or contingent (ie your supplier receives an agreed percentage of any savings) and should be treated as separate to the core contract.

Your supplier should be in a position to provide its services for less than any other third party as they are already integrated into your organisation. With time, you will identify areas where your supplier is effective.

You should always demand service excellence and include periodic review points and opt-out clauses in your contract to ensure you are able to look elsewhere. It may be worth paying a premium for a customised flexible agreement.

Improving your working relationship is more effective

Chris Hemingway, Cranfield School of Management

Service contracts are long-term, so the balance of power changes over time. Before a service contract is signed, power resides mostly with the buyer, who can choose between suppliers. Once an agreement is made, power shifts in favour of the supplier. This dynamic often leads to negative negotiating behaviour on both sides. The buyer tries to squeeze down the supplier's margins, while the supplier tries to create a vague contract to inflate charges after the deal is made.

As a result, negotiations often create mistrust, sour working relationships and result in lose-lose agreements. Effective negotiation requires mutual understanding, a focus on interests rather than power and, above all, clarity.

Think about the desired outcome from both perspectives. A buyer's cost containment is a supplier's lost revenue; the buyer's flexibility is the supplier's uncertain cost; and a buyer's value-added can ensure a supplier's continuity of business.

Be creative in exploring alternatives to learn your supplier's preferences and match them with your own. What do "value-added" and "flexibility" mean to you? Do they involve costs or uncertainty for the supplier? Are you prepared to pay for this? Can the uncertainty be managed?

Addressing interests in this way moves negotiations towards finding a workable contract rather than battling over costs. You may not squeeze every penny out of your supplier but improved working relationships usually pay for themselves.

Decide on a price rise strategy for your suppliers

Anthony Harrison, NCC Group

You have identified that you need to maintain a win-win position where you want good value and your suppliers want financial stability. You need to consider two categories of price changes:

l Those linked to general economic changes. Your contracts should make provision for those prices that may change through general inflation or deflation. This can sometimes be combined with sector-specific changes reflecting the cost of in-demand skills.

l Prices linked to changes in service performance, resulting in better or worse value being delivered to you. You could take a service level agreement-based approach and pay more or less after reaching certain levels.

Alternatively, you could look to share the value of service changes with your suppliers by agreeing the ratio to which the value will be split. This could be linked to a robust open-book accounting regime to allow both parties to measure the impact of service performance changes.

Do not accept that price increases are inevitable

Robin Laidlaw, President, CW500 Club

Altering your defeatist attitude that price rises are inevitable would be a good start. Ask for a roadmap and what you will get, if anything. Ask for information on new releases, forthcoming functionality and whether products will remain fully compatible.

Future threats that version 17.009 will not be supported after a certain date mean you should look at what that means to you. How long can you operate without manufacturer support?

The truth is that we have created this demon as a result of the days when functionality was limited and we urged for enhancements and new releases. But we are now in a maturing industry and cannot expect the pace of change to continue to increase.

My six-year-old BMW is really not so different from today's model. The interior is very similar and Imay have one zillion less tiny computers on board, but I don't care because mine is comfortable, cruises effortlessly and is maintained by BMW at a reduced price because of its age. So why update?

It is the same with software. Do not negotiate into a position up front where you accept price increases. Monitor the integration capability of your version, but do not become a slave to upgrading.

User groups are a useful way of entering into a dialogue with suppliers. If enough users resist unnecessary, cosmetic changes, the overall pace will gradually slow down and we will all benefit from the reduced costs of a stable, mature environment.

A long-term deal with a large company helps negotiations

Roger Marshall, Elite

We are always being told that everything is negotiable and that price lists are a thing of the past, but that is not the experience for most of us. Once we are committed to one supplier and its products, the reality is that it will point to the contract and impose whatever price rise it can get away with.

To get yourself into the right negotiating position it helps to be a very big customer and to keep your options open. If your supplier knows you can and will reduce your business, either through a different supplier or by bringing work in-house, it will be more willing to negotiate.

However, a long-term deal can guarantee a supplier's cash flow and enable it to invest in providing service improvements to you. Much will depend on how the supplier perceives you as a customer and the general state of the market, so do your homework before starting negotiations.

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