Friday, November 30, 2018

The "Preliminary Discussions" Gambit.

Procurement best practices argue that for the most part you want a competitive bidding environment when you're looking at procuring a product or service. It's extremely rare that there aren't at least 2 major players to choose from for any class or category of information service. Consider:

  • Financial Analytics platforms: Bloomberg, FactSet, S&P Capital IQ, Refinitiv Eikon
  • News Providers: Lexis-Nexis, Dow Jones Factiva, Acuris, TheDeal
  • IT Market Research: Forrester, Gartner, IDC, IHS, Ovum
  • Audience Measurement: comScore, Nielsen, Quantcast, SimilarWeb
  • Oil & Gas: Drilling Info, IHS, Wood Mackenzie
  • Private Markets: Preqin, Pitchbook, Datafox, CB Insights

and so forth.

In each case, you'd want to create a competitive process to get the best price. If, for example, Factiva thinks you may go with Lexis-Nexis, you're likely to get a far better deal than if they think they're the only outfit under consideration.

But sometimes, you can leverage an early non-competitive discussion into a great deal - if you're willing to go with a vendor without running a full vetting process.

There are risks, obviously. You're proceeding with a service without conducting a detailed comparison of competing products. You also run the risk that you may overpay.

But if the circumstances permit, you can try what I like to call the Preliminary Discussions Gambit (PDG).

Here are the necessary preconditions for a successful PDG:

  1. The vendor is a disruptor to the space and challenging entrenched incumbents;
  2. The vendor is flexible on price;
  3. The vendor doesn't have a lot of customers yet, but have a fully commercialized and usable product.
  4. The vendor is often PE backed and looking for customer growth and not particularly worried about maximizing revenue (i.e. they have cash to burn);
  5. The product you're buying isn't business critical and is a low risk acquisition - the cost of failure is low;
  6. You're already somewhat familiar with the products and vendors in the category.
To execute a successful PDG, tell the vendor you're just in "preliminary discussions". You haven't begun speaking with any other firms -- typically the incumbents they're trying to take business from.  You're almost always going to get a better deal if the vendor reaches out to you first, but it's fine if you reach out to them. 

Many times, a vendor will try to preempt your vetting process and try to land a deal before you've started. That's ok! In fact, use it to your advantage. You probably won't have more leverage than at any other time in the negotiating process - take advantage of it. You might even make the first offer - and be quite aggressive about it. You may be surprised - the vendor may go for it. 

It's rare that you will take a product from a vendor without undertaking a thorough review of the landscape. But occasionally, the circumstance are ripe for the Preliminary Discussions Gambit. Don't hesitate to try it - as long as you know the risks.

- Kevan Huston

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