Cutting the Right Deal with a Services Vendor

Negotiating Vendor Services Agreement 

When you buy a car, it’s your job as a buyer to get the most amount of car for the least amount of cash.

At the end of the day:

  • It’s a one-time transaction

  • You have no (required) post-purchase relationship with the dealership
  • The price you negotiate has no bearing on the quality of the car you drive off the lot

As a quick aside, here’s a car negotiation technique I’ve found to be effective:

  1. Do all your car research via the internet (make, model, features, color)
  2. In Word or email (something you can copy and paste from), write the following blurb: “I’m looking to purchase a (make, model) in (color) with the following (features) this (pick a day within the next seven days). My credit is excellent and/or I have the cash to make this purchase. I’m sending this message out to multiple dealers and will buy from the dealer with the best price and terms.”
  3. Visit your car maker’s website and put your zip in to locate a dealer (go 50 miles and you’ll get a healthy number of dealers)
  4. Click the link for each dealer and click Contact this Dealer
  5. Copy and paste your message into the message section of each dealer’s Contact this Dealer page
  6. Do your negotiating with multiple dealers over the phone/via email and cut the best deal
  7. Note: if you can, pick a time that works to your negotiating advantage (the end of a month, the dead of summer, the days around a holiday)

Back to the blog…vendor servicing relationships on the other hand are a little different.

At the end of the day:

  • Transactions (in most shapes and forms) are ongoing
  • You do have an ongoing post-purchase relationship with your services vendor
  • The price you negotiate has bearing on the quality of future service

So with these challenges in mind, the following captures the concepts of ‘net back’ you should consider when negotiating ongoing servicer agreements with vendors.

Your best return on investment - Maximize your ‘net back’

Here’s how I how see ‘net back’:

  • Your goal is to get the difference of output minus expenses (‘net back’) to its best possible value – in a revenue production model, you want to maximize net cash (the revenue that’s left after expenses).
  • A low price (or the lowest price) doesn’t always lead to the best ‘net back’. Service vendors may have to scale back operations to make margins work – scaled back services might create missed output opportunities (missed ‘net back’ opportunities).  
  • Use the following points as a guide to maximize your ‘net back’:
    • One more uptick in price won’t yield a corresponding uptick in ‘net back’ (make sure you don’t pay too much)
    • One more reduction in price won’t create a missed ‘net back’ opportunity (make sure you pay enough)
    • What combination of output and price produces the best ‘net back’?

In short: don’t focus on output and price as independent line items in your negotiation – focus on which combination of output and price produces the best ‘net back’. One quick caveat: the combination of output and price assumes you’ve vetted your services vendor to make sure they’re effective and efficient (obviously, you shouldn’t pay more to compensate for a vendor’s inefficiencies/ineffectiveness).

As always, we're interested in questions and your comments below.

Topics: change management, Services Vendor, Outsourcing, healthcare receivable management

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