Thursday, October 11, 2018

The Ethics of Negotiating with Multiple Vendors for the Same Business

Should you concurrently negotiate, including redlining contracts, with two different vendors for the same business, knowing that only one will be selected?

Of course, you say. What a brilliant way to arbitrage competing bids and drive down the price. Why wouldn't you do this?

Well, what are the costs of doing so? And what, if any, ethical considerations should attend to this scenario?

It's rare that you will have a vendor offering service that's substantially similar to another vendor's service such that you could simply swap one for the other. It's common in highly concentrated sectors with two or three main suppliers. Banking analytics platforms, ratings agencies, and media measurement vendors are supplier segments where products are substantially similar for general business purposes. There are differences on the margin, but on the whole the services are comparable, if not completely fungible.

(Before you protest: yes, I am aware there may be material differences in what, say, Moody's, Fitch and S&P. I am speaking of general use cases you'd find in consulting firms, law firms, and advisory banking).

Let's take online media measurement. There are two main players: comScore and Nielsen. You are interested in subscribing to a service that track internet traffic in the US, Canada and UK. Both vendors can offer you this, with minor variances in price and features. Your marketing department desperately needs an online measurement service by June so they can start buying for the Christmas shopping season.

What are the advantages of a concurrent negotiations?

  1. Timing. Often times you are under the gun to get a deal closed, either to meet a budget deadline or to meet user demand. The service is desperately needed to support a new business unit, and you can ill afford to wait for negotiations with one vendor to fall through and then start up with the other. You have a clear preference, but should it fall through, you can quickly pivot to the competing vendor. 
  2. Price Arbitrage. In this scenario, you're actually telling each bidder you are negotiating with the other. You're creating a competitive scenario throughout the acquisition process. This is similar to an RFP, but the difference is that you're not selecting a vendor until just before you sign on the dotted line. 
  3. Non-commercial Terms. As with price, keeping two vendors bidding for business gives you maximum leverage in achieving concessions such as licensing and content redistribution rights. 
Right, but what about the disadvantages?

  1. Hard dollar Costs.  There are hard dollar expenditures associated with procurement (regardless of how much operating leverage you've built into your process, this is unavoidable!). Mostly this is legal fees with outside counsel, and potentially some IT costs associated with a pilot / proof of concept and the build out of a test environment. 
  2. Opportunity Costs. What else could you be doing with your time? How about your staff? Surely you have other things you could be doing instead of negotiating with a vendor you have no intention of retaining. Right? 
  3. Ethical Considerations.  Do you want to waste a vendor's time when you almost certainly won't retain them? From a completely ruthless standpoint, you shouldn't care - this is just a cost of doing business for them - not your problem. But remember: companies (even vendors) are filled with people like you who are working hard. Is it fair to waste their time? My advice - be honest with yourself about the actual likelihood you will retain them. Don't string them along if there's no chance you'll close with them. 

I am a fierce advocate for negotiating hard to get the best deal possible. But always operate in good faith. The world is a small place, and your industry is even smaller. You don't want to develop a reputation for operating in bad faith. In paints you - and your company - in a bad light. The Golden Rule applies to negotiations as it does in every other part of life. Follow His lead!

- Kevan Huston

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