Howard Richman is the head of global indirect procurement at Citrix Systems. He has developed, negotiated, and executed category strategies for pretty much every indirect category you can think of. Howard has presented at IACCM on both software negotiations and how to run a legal services procurement category. He has led numerous round tables at Procurement Leaders at Marcus Evans CPO events, and was a recent keynote speaker at the Procurement Leaders on procurement transformation. I've been wanting to have this conversation with him for some time, and we focused our discussion on procurement negotiations within the IT and IS space. As ample forewarning on this one, we touched on a few legal concepts, but we are not lawyers. Obviously, don't take our word as the gospel truth for any legal concepts that we talk about. Please seek qualified legal counsel if you need help with legal issues around agreements that you're negotiating.
Mark: Howard, how are you?
Howard: I'm doing great. How are you today, Mark?
Mark: I am very, very well. Thank you. Thank you so much for joining us. It's truly an honor to have you on the line.
Howard: Well, thank you, and I'm really looking forward to this discussion.
Mark: Yeah, I think it's going to be a lot of fun. I've been wanting to dive into the whole topic of IT, IS procurement and negotiations for some time. To help frame this discussion for the listeners, we're going to be focusing our discussion today on negotiation and procurement within IT and IS services companies, and people who buy IT and IS products. Those are the types of questions that we're going to be asking. We may dive into a few pieces here and here, but it's going to be pretty loose and conversational, and we'll just dive right into it. Howard, when you started your career, you started in finance. It seems like a lot of people from the finance world end up in procurement at one point in their career. What drove you into procurement?
Howard: What drove me into procurement was the desire to actually make an impact every day. I'll be quite frank. In finance, I was doing a lot of controllership work, working at putting together budgets, and then doing monthly variance to budget, and then putting together forecast, and then the variance to forecast, and then the variance to the variance. After a while, it just got to be real drudgery. I was actually wondering, does anybody really do anything with this information? Do they actually use it to actually make business decisions, and to make changes?
I just felt like there was so much more to be done, and then when I got introduced to procurement, I realized, this is amazing. You could actually go into work every single day, say, "I'm not leaving here until I make some sort of an impact on the bottom line." There are very few positions in the corporate world where you can do that. In sales, you can do that, and in procurement, you can do that. Just the energy from that is what had me motivated.
It was also because I had an MBA. Even though that MBA was in finance, I felt I needed to put more skills to work in procurement than I did in finance. I had to analyze suppliers. I had to analyze markets. I had to analyze trends. I had to analyze me own internal businesses, and what they were trying to achieve, and then put that all together into a strategy, and then act as an agent of the company to commit the company's funds to actually make a difference, and to drive the strategy of the business forward. All of that says to me this is the best use of my MBA that I could ever find. That's why I never left procurement.
Mark: That's an awesome story, and I find that people who come from the finance world and going to procurement are able to leverage their experience to a whole new level, just like what you are talking about, to a whole new level when they're approaching business. Those finance skills, when they're applied to a procurement context are amazing when you can fully leverage them. You know what? It seems to me like you've got a real approach to cross-functional team building, having that finance background coming to procurement. It looks like your team recently won the 2017 Procurement Leaders Cross-Functional Transformation Award. What is that award? Why do you think you were able to win that, your team was able to win?
Howard: Well, it took three years for us to get there. I had to build a team, and we built that team from scratch. I recruited in some amazing people who were not only subject-matter experts in the various elements of different categories of procurement, but also who were willing to take the stripes off their sleeves, work together as a team, and really communicate well with internal business stakeholders to get them aligned, to get them on the same agenda, so that we could actually drive meaningful change in the business that will drive value for the business. That's what cross-functional transformation is really all about.
After doing a number of things, and having many successes at this, and publicized most successes, and giving credit to the business people who work with us to make those successes happen, we started, basically, building momentum around that. Then people began to see us differently. As procurement people, first, we needed to see ourselves differently. Our purpose wasn't to do procurement deals. Our purpose was to solve business problems, of which there was some sort of a supply chain element to that business problem.
We engaged in that what we call boundaryless behavior to make sure that we look at these business problems end to end, and apply the best practices in procurement that we could, but also in how you form teams, how you put representation on those teams, how you facilitate meetings, and how you get people to lean into discomfort to really drive toward change, and then own it. It was our ability to do that over time and accumulate successes that really led to us putting ourselves forward for a nomination, and we were lucky enough not only to be a finalist, but to actually win that particular award.
Mark: Fantastic, and it sounds like you've got a massive focus on team development and people development in your organization. I read a quote, and forgive me if I'm misquoting this, but I think you said something along the lines of "People aren't an asset. They're our only asset." What do you mean by that? Why do you think having such a good cross-functional team is so important?
Howard: Yeah. Yeah, and this is something I learned maybe 20 years ago when I first started managing a team of IT procurement professionals. What I said at the time was people are not our greatest asset. People are our only asset. You always hear HR people make the statement that people are our greatest asset, and then you see the next layoff, and you're wondering, "Wow, gee, why are they doing that?" Right? In my mind, the only thing you have going for you, especially in the indirect world, all the people who work on your team.
They're the ones who make or break everything. They're the ones who discover the opportunities. They're the ones who lean into discomfort. They're the ones who ask the five whys, and try and push the envelope with stakeholders. They're the ones who then lead people through that process, that uncomfortable process of change to try to end up creating something better. They're the ones who have to paint the vision for people about what's in it for them, and how it's going to be much better on the other side when they get done with this.
When I say people are our only asset, I really mean it. It's a mindset. It's a philosophy, because I've never seen it work with bad people. I don't care how good your systems are. I don't care how good your process is. I don't care what your technology. I've never seen this work with mediocre or bad people, period. That's what's really behind it.
Mark: Yeah. I 100% agree with you. Focus on people and developing people, and developing their skill set to make sure that you have a strong team is often overlooked as just something else that the business has to do as opposed to the primary thing that the business has to do, because in order to remain competitive, the development of your team has to be paramount. I'm totally onboard with what you're saying. These people that you're mentioning, the team that you're developing, they're the ones that had, like you say, has to face the challenges. Certainly, the IT and the IS business has a number of challenges right now that are unique to IT and IS. What are some of the challenges that IT and IS businesses face right now?
Howard: I mean, that's a great question. This is the first time that I'm working for an IS or a IT company, one might think, but I spent 15 years in pharmaceutical, and guess what, there's no difference. What are you doing in pharmaceutical? You're actually producing and selling intellectual property. It's in the form a pill or an injectable that people make, but the gross margins, so the cost to make the product is very small from a relative standpoint. Really, what you're doing is you're buying IT. You're selling IT. It's no different when you're in the software business like we are here at Citrix.
The things that really differentiate a software company though are that, for example, 90% of the spend that goes on within this company is indirect spent. It's SG&A of some type or another. It's very little that's really direct material stuff. When you're in an environment of indirect spend, in most companies, it's the Wild Wild West. There's no mandates. There's very little oversight of it. Because there are no mandates for procurement, you've got to find ways to create that mandate in the minds of your stakeholders in the business as to why procurement is a great partner to work with.
First, you have to go about that whole selling process of getting people to see what's in it for them, and why they should work with procurement. This is the funny part. I say to people all the time that two-thirds of the negotiations are internal negotiations, and one-third of the negotiations are external negotiations. Guess what, the external negotiations are easy. The reason why they're easy is because you have the same agenda. You need to buy something, and the supplier needs to sell something. You're aligned, but on those internal negotiations, that's never the case. You have to figure out what the agenda is, because rarely do you have the same agenda.
Procurement's agenda might be, "Oh, I need to claim $300,000 worth of savings on this particular category." That may not be your stakeholders business requirements or their agenda, and so you need to truly work on figuring out what that agenda is, and to listen to one another a lot, understand how they see what's in it for them, and then to drive toward the same agenda. You have to go through those internal negotiations and spend a lot of time doing it before you ever think of even approaching the outside world and negotiating externally with your supply base. I think that's one thing that makes the IS business somewhat unique.
The whole issue here is that whenever you're negotiation for intellectual property, and much of software is really just intellectual property. It's very different from negotiating in the direct materials world, where you can look at purchase price of everything. You can do purchase price cost analysis. You can look at all component cost, and you can look at your entire supply chain, and how many flows through the supply chain and creates value all along the way. It's not like that when you're negotiating for, basically, software, intellectual property. It's a whole different though process, because gross margins are extremely high.
When you have high gross margins, you have to figure out when you're negotiating with the sales people, what's really motivating them. Is it total revenue that they can book or recognize, or is it just total booking value? How were they compensated? What's their bonus structure? What happens if they've already met their quota for the month or the quarter? Does that really come in to the negotiation? You can play that awful game that exist, but you have to buy, which is end of quarter or end of year, where you're trying to make that purchase, because you think you're going to get that great discount, because they're going to give it away at the end, that they can meet their quotas, get their bonuses, whatever. I mean, that can be a game of chicken sometimes, because if somebody has already exceeded their quota, maybe there's no incentive for them to do it.
You've got to think differently about the people that you're working with, and trying to negotiate with. Guess what, they're doing some really sophisticated things to figure you out. They've got this Miller Heiman blue sheets, which they're red flagging who the decision-makers are, and who the blockers are in your own company. They're figuring out all the ways that they're going to get around procurement, and be able to sell their software or their intellectual property to the CEO, or the CIO, or to somebody in a position of power, and basically, eliminate any ability to leverage that requirement. They're pretty sophisticated.
Those are just some of the differences about what it's like when you're working in this particular IS, IT world, you have a lot different approach to negotiations because of that, and you need to do your homework. You need to do a lot of research, a lot of planning. You need to understand the market dynamics of what's going on, but you also need to all know just very basic dynamics of how the people you're working with are being compensated.
Mark: Yeah. Yeah, it's interesting to have someone on the line who understands the indirect area a lot, and to show the differences between indirect and direct. Like you said, a lot of the indirect negotiation, like you said, two-thirds of the indirect negotiation comes from within the organization, and understanding what the mandates or the decision-making process, or really the business direction is going to be. A lot of the time, the business user that you're working with doesn't necessarily know what they want. The know the problems, and they know that they need to solve the problem, but they don't know necessarily what they need to solve the problem.
Being able to understand what they need and being able to find what they need to solve that problem is a big deal. That differs between each group that you're dealing with. In the note that you sent me, which I find super interesting, you mentioned that 2017 has become the year of the chief marketing officer, where they have become more responsible for technology buying than the CIO. There's been a shift in who your main decision-maker is when it comes to purchasing technology. What are some of the implications of that major shift?
Howard: I mean, that's a great question, and I want to go back to some of the things that you talked about, which is oftentimes what we do in procurement, when we're working with our internal stakeholders, is getting them to figure out for themselves what their business requirements are, what are their must haves versus what are their like to haves, and what are the trade-offs that they're willing to do, and what's their best alternative to a negotiated agreement, when you have a contractual issue, and also, who is the decision-maker? In many cases, procurement is never the decision-maker, because procurement doesn't hold the budget. The decision-maker still resides with whoever holds the budget, whoever's money it is.
Getting people to express these things in terms of what their real needs are and wants are, and understanding the trade-offs, getting them to just agree to that approach is in and of itself a major task that you have to do. I have said this many times. The biggest mistake that buyers or negotiators make is not that they didn't get a good deal, is that they negotiated for all the wrong things, because they never understood their business requirements. Then they try and take that contract and throw it over the wall to the stakeholders. The stakeholders look at that and say, "I've got no use for this. This isn't what I need." This happens all the time in the indirect side if you don't approach this the right way.
Trying to figure out who all those business people are within your company, and then getting them to see that they're not the only one who has that need, and that you can actually consolidate the requirements across different departments, different divisions, different business units, different P&Ls, and getting them to buy into the fact that they all have something to gain, that there's a what's in it for them in this, and getting them to coordinate, be part of that. That's where the real battle is, and decides whether or not you're successful or not in any of this. In my world, that's always been the challenge in the indirect side. I know there was another part to your question here, so remind me of that part.
Mark: I loved your answer there in terms of indirect, by the way. The other question was we've seen shift from the CIO or the CTO to the CMO spend. What are the implications of that, because the user group is now shifting, so how do we address that going forward?
Howard: Well, and this is an incredibly important dynamic. It all started with big data, right? I like to refer to Tom Friedman, one of my favorite authors. In books like The World Is Flat, he talks about the changes that are going on. More recently, he talks about how we're on the second half of the chessboard. The amount of data in the world doubles every two years. In the world of big data, we're getting to huge explosive numbers. As we're on this second half of the chessboard, we are faced with all sorts of opportunities that big data has, and there's no bigger opportunity than what it means for understanding customers, and products, and how these products are being used, and how you target these products to your customers, and how you get click-throughs that turn into sales, and then getting feedback on social network for what you're doing. There's just tremendous explosion of data.
Many people in marketing, they're really not numbers people. They're not used to this so much. Bringing in some analytical skills with you to help them understand that if we can get the right metrics into these contracts with these suppliers, and if we can get the right gain share type of arrangements with these suppliers, we can produce much greater results that'll be of much greater value to the company, and put them in a much more competitive situation, and be much more successful in the marketplace. Procurement has a role to play in that if they can help steer marketing people to actually spending their money on the right things, because they're so confused by this.
They have all of these different bespoke specialized applications coming at them, where people can promise them the moon of what kind of value they'll see, and basically, they buy them all, and they throw them all against the wall to see which ones are going to stick, and then figure out, okay, I got one that stick. Let's start doing this. So much money is wasted in this, and the role that procurement can have in the upfront planning with them to drive success in this area, this area of big data, of how markets are being assessed, customers. There's many challenges associated with this, but there's a tremendous reward associated with it too. Procurement really needs to step up into this area more than ever before. This is the real opportunity area right now. The spend there is going to increase by leaps and bounds.
Mark: Yeah, great advice. I think being able to approach the marketing departments, or the new user groups in different ways than we have in the past, I think, is going to be critical for us. Being able to understand what their motivations are in terms of driving sales, driving marketing, is also critical. No longer are we just dealing with a software application that helps in operations based or something like that. These are the types of numbers that are driving the numbers, essentially, driving the sales. To be able to focus on their needs to help drive those sales and speak to them in that context need to become part of our negotiation vernacular when it comes to speaking to those departments internally.
I think showing people that those negotiations internally are also different. Often, I hear a lot of people say, "Look, the negotiations are the same." They're not. They're not the same. I mean, the format may be the same, or the process may be the same, but the words that you use need to be critically different when you're approaching different user groups. I think you're 100% on the right track there.
Howard: You just nailed that. You just nailed that, Mark. It's really important. It also talks to the fact that what we're buying is changing drastically. We're moving from this on-premise license with maintenance world to this software as a service subscription app world. That change is so dynamic and has such implications for businesses, and not only for marketing departments, but for entire businesses and how they are structured, and how they function, and how we as buyers have to actually respond to that, so that we're negotiating for the right things to drive business value, and that's tremendous dynamic.
We have to all of this also in an environment where data security and data privacy are of the utmost importance. What I'm finding is in a lot of these agreements that I have to negotiate, we're putting a tremendous amount of emphasis now on making sure that these companies can assure use their data privacy, that they can make sure that they have the indemnifications and limitations liability that are necessary to protect us in case of a data breech, and that without these protections, we'll walk away from deals with companies that won't protect us in this manner. The whole terms and conditions piece of the negotiation has now taken a much huger level of importance than it ever did before. That's a big change in what we have to do, what we have to focus on as part of this as well.
Mark: I agree, and I find that at least in the negotiations that I've done in the past, the willingness for seller of a software to indemnify a buyer of a software for those kinds of breeches can be very challenging to negotiate, because I find that if they want to do that, then they want to put taps on it. Then if they're going to put taps on it, then they're limiting their liability in other ways. I find that there needs to be a joint realization from both sides of the table to come to terms to the fact that, look, data, like you said, is going to be the biggest thing that we deal with on an ongoing basis.
The protection of that data is incredibly important to both companies. Obviously, both companies don't want to be liable for something that's a breech that may be out of their control by a third party. Making sure that, especially if they're housing data on a third party cloud, then that security becomes paramount, and how you negotiate that security, and how you negotiate indemnity obviously is a big, big deal.
Howard: Oh, yeah. I mean, and everybody is moving to the cloud. It's either public, or private, or hybrid type of clouds, and the ability to create some sort of a secure perimeter around that is paramount. More and more, another big trend that's happening with all of this is the advent of artificial intelligence, and the ability to use artificial intelligence to actually become more predictive, and do the analytics for you in terms of security. It's a very different thought process. Before it was just about, okay, let's have layers, passwords, questions that people have to go through. Now, it's more around how do you have a software define perimeter to protect you in which you're constantly analyzing and doing predictive analytics of the various intrusions that are coming in, and figuring out patterns, codes, of what's happening.
Like I said, this means that you've got to look for different products, and buy different things to defend your company. I know that my chief information security officer, our company has now merged the two roles, because how important this was to build security into everything we do from an IT standpoint. The ability for us to do this, and he's got to defend against 4 million bad emails every day. In those 4 million bad emails every day, there may be a number of them that are really ugly viruses, Trojans, and other types of nasty things that are looking to steal your data, and/or sit and reside somewhere, and then grab a hold of all the personal information that's residing on your servers.
This is a big struggle right now. A lot of our IT procurement nowadays is focused on these kind of products and being able to fend off just data breaches. This is an area where procurement needs to develop better as well. When you're negotiating for these kind of agreements, and you're negotiating for them, and they're SaaS subscription type of agreements, and instead of paying that one-premise license and annual maintenance, now you're paying a subscription. It's no different than what we're doing right now in our Microsoft Office 365. I mean, I've just got the bill last month from Microsoft for my wife's iPad Pro. It's $70 a year. Every year, I'm going to pay that $70 as long as she has that iPad. It never used to be that way.
Well, guess what, if you do the total cost to ownership on this, Microsoft is making a whole lot more money right now by doing this than they are in paying that one $120 license sale upfront when we buy the machine. This is a huge change. If as procurement people are trying to help shape the cost profile of the company and defend it, this is a very difficult area to defend against. It's something where we will have to work very hard to make sure that we're only buying the licenses that we need, and that we demand manage, and we make sure that if somebody leaves the company, we don't continue paying for that subscription. Our ability to change licenses, the usernames, the whole management of licensing becomes more important than ever.
These are just some of the challenges that we're facing right now. One may not think of that in term of, well, yeah, what's that mean for negotiation? I can tell you this. It means your negotiators are now spending a lot more time not negotiating, but trying to plan around these other things, the finances, the how do you shape the overall CapEx versus OpEx battle that's going on, because all of these software licenses, the subscriptions that you're talking about, they're all operating expense that's hitting your P&L. You can't capitalize on these anymore. This is making a huge impact on the financials of companies as well. As procurement people, we have to figure out ways that we can make sure that the P&Ls are maintained, and that we can deliver the profits that we need to, to shareholders
Mark: Yeah. I mean, now you're preaching my language, basically. I think the movement from CapEx to OpEx is such a huge topic that we could probably spend an entire episode just talking about the implication of cash flow changes, and how capitalization of the former expense is now operating expense, and how that effects, really, effects your negotiations going forward, and how do you determine what part of the license's maintenance for, and you can't really do that now.
Being able to try and negotiate an OpEx versus what your CapEx ... Negotiating it on-premise compared to a cloud-based solution is significantly easier, because you can actually separate the costs to a certain degree, whereas in the OpEx world. It's really difficult to do that. You've got to manage, like you said, that license rationalization, manage your licenses much, much closer on an ongoing basis, because otherwise, you're just going to get creamed on your cash flow. It's not going to work for your finances.
Howard: Yeah, and software companies will say, "Oh, yeah, but you've got this flexibility with SaaS licenses, because if you don't like what you're doing, you're paying a monthly subscription, you cut off your subscription at any time." Well, guess what, that software is pretty sticky. Once you bring the software in, and then you start building in all your infrastructure around being able to use that software. Suppose that software is helping you to determine how to compensate you're sales force, and then you build all these internal systems around it, and then what are you going to do? Stop compensating your sales force because you don't have a system to do it on.
It's no different. Software, once it comes in the door, has a way of creeping into all sorts of aspects of your business life, and to try and separate that software out once it gets in there can be very, very difficult. It's very sticky. When you're going about doing this contracting, you've got to keep that in mind. Having termination clauses or having breach of contract clause or whatever, they're not going to get you what you actually need. You're just barking up the wrong the tree. If you think that that's going to protect you, it's not.
You have to always be thinking three steps ahead of what's the end game here? How is this going to play out within the company when I bring this software in? What am I going to do with it? Am I going to use all the functionality of that software? I mean, the great thing about SaaS software is it's going to be updated. Every couple of weeks, you get another updated, and so the functionality improves. You'll eliminate bugs. That's all good, if you're actually using the software for its intended purposes. If you're not, if you're only using it for a small part of your purposes, then you're overpaying for it.
The one thing I always think about is I've got this philosophy about technology, and that is 95% of people use about 5% of the functionality. When people get a laptop handed to them, that laptop nowadays is enough to send a rocket to the moon. How much of that functionality do they use? They use it for web surfing, Word, Excel, PowerPoint, and that's about it, and emails.
Mark: Yeah. Yeah.
Howard: The thing is, but there's so much technology here. It's no different when you're handed a lot of SaaS software. They're trying to sell you based on some sort of a value. They tout based on our value, or maybe they're trying to price you based on your budget. Maybe they're just pricing you based on greed, because they happen to be only game in town at that particular point in time for that functionality. We as buyers, we're always thinking about, wait a minute, well what does it cost? Well, there should be cost clause, some sort of fair margin, or this should be based on competition. I should be able to go out or see this and be able to get competitive prices for like-minded types of software that have this functionality and be able to do what might.
Guess what, you've got to work through those issues. They're not selling to you on cost. They're not selling to you on competition. They're selling to you on greedy. They're selling to you on the proposed or perceived value that you're getting, and the functionality of which you may have very little use. These are all the challenges that you have to deal with, but these are no different that challenges that procurement people have always faced. It's just a matter of having your eyes wide open as you go through it.
Mark: Yup, 100% agree. We're absolutely on the same page. Let's switch gears a little bit. I'd love to hear maybe a story of a negotiation that you've had that hasn't gone as well as you would've hoped, maybe a negotiation, say, that a lot of our listeners learn a bunch from the discussion like we just had, but many of them love to hear about failure that others have had, so that they can try and avoid those in the future that you could walk us through something like that.
Howard: Yeah. I sort of knew you were going to ask me this question, Mark. Unfortunately, the list got so long of these failures that I had to ... I'll tell you. Just going through the list really had me thinking about how did I survive this long. This brings me to a saying. There's only one thing I learned in my entire graduate school of existence, and that was one saying that one professor gave to me he said, "A wise man learns from history. The fool learns from experience." Then I took that saying and I made it my own by saying, "The wise man learns from history. The fool learns from experience, and that's why we're all destined to be fools."
The fact is, is that we learn from our experiences. We remember our experiences really well, and then that shapes who we are, and it shapes our future vision of the world. Just reading something in a book just doesn't get you there. Some of the really tough experiences I was just talking from, one of my head of IT procurement here, I remember being in an ... This happens a lot in the software industry. You get threatened with an audit about license, not being properly licensed for the software that you're using, and that that software has been perpetrated throughout the company. It's been spread in an unlicensed manner. You don't have proof. In the end, it's always you're guilty until proven innocent.
In the terms in many of these licensing deals, you have to prove that you are in compliance with the license terms. If you don't have the documentation post, well ... I was with one of my companies, we got caught in one of these situations. I was working with the lawyer on how we were going to negotiate a settlement with this company. The CIO came to me and said, "Hey, look, one of my VP is here in IT wants to participate in this. I think it would be a good learning experience as well." I said, "Okay," and so we gave her a little prep and some talking points, and we walked through it.
We get into the negotiations with the supplier, and we're plodding our way through and working it, and sort of holding to our case. Then this VP blurts out just one very innocuous statement, and the lawyer and I just looked at each other, and we know that $250,000 has just gone out the door. It was a horrifying moment. We didn't tell her afterwards what she had done, but we knew that just that one statement, that one innocuous statement that deviated from our talking points cost us that much money in the final settlement that we ended up with.
We've also had a number of instances. I mean, there was one really bad one, where a software company had introduced some software into our production environment on a beta trial basis. Some people forgot that it was a beta trial basis, and they started using it real production, and then they spread that licensing to other people. The company, they started utilizing it. I and my team, we heard about this. We knew that they were going to do an audit and claim against us. They made a huge claim against us. Without doing our homework, we sort of announced what I would say as a counter claim or a counter position to it. We're talking millions of dollars here.
In the end, we looked really stupid doing it, because we hadn't really done our homework. They knew more about our internal operations than we did. They had more insight, because they talked to a lot of people in my company who had loose lips, and they just told them everything about what we were doing with their software. It cost us, well, I'd say an incremental million and a half dollars because of that. These kind of situations that I've lived through, patent holes, which I've come in and found similar type of opportunities. Well, all they need is to find one person on the company to say something that bolsters their case, and then you're liable for a six, seven digits.
This has happened several times to me in terms of running an IT procurement organization. Every time it happens, you learn something new. It's about trying to prevent it. The only way you can prevent it is really working closely with your IT and your engineering organizations where the licenses reside, and do basically training, and teach them to say nothing. Say absolutely nothing. If somebody asks them, they'll always try and come through the CIO or the chairman before anything goes out the door, to aspire, but it's very hard to control that.
I'll tell you, every one of those experiences really hurt. Yeah, I can say that I learn from them. I also know that there are limitations within corporate government structures, where you don't have total control of everything. It was just sort of ... The fact that I even tried to make a counter offer on this one particular case was probably not even helpful, and just became an embarrassment, because it sort of let my own company know that I thought that there was a better settlement to be had, and there wasn't. I falsely set expectations that we could settle for better. That was a huge mistake. I'll never forget that one.
Mark: Yeah. You know what? I think for those of us that have worked in software or IT procurement for some time, the word audit immediately sends shivers down our spines, because it's, first of all, from a business prospective, I think it's just a terrible way to generate revenue on the software, like what a jerk way of doing business. The second part of that is just the fact that those companies know significantly more about the operations, like you said, than potentially your own teams do is not uncommon, because they're managing all of their license releases. They're tracking all of their license releases, and so for them to know that information is not uncommon.
For people who don't operate in the software or the IT space, this comes as a shock, because usually on the services side, the procurement organization is the one that's auditing the supplier, not the other way around, whereas in software, it's the other way around, in terms of managing that license. I can definitely empathize with you. I think given where IT and IS is headed, and given the cloud, it certainly throws up a lot of questions for a lot of people in terms of what does the future look like. We've touched a bit on that today, in terms of IT and IS, and maybe even a couple of the sellers that you guys have had. If you could give any tips or advice to your 30-year-old self on what you would do differently in negotiations, what would you do?
Howard: Yeah, I was so much older then. I'm younger than that now, my 30-year-old self. Well, one of the things I did though in my career was as a buyer and a negotiator, I spent four years as a raw materials commodity trader. One of the things I learned is that timing isn't everything. It's the only thing. There is a cadence to all negotiations, and you have to plan for it, because if you get caught doing the wrong thing at the wrong time, you get suboptimal results. What I just think just in my personal life, if I go to buy a car, I know I'm going to need to buy a car. I plan on making four trips to the dealership before I close the deal, because I know that that's what it's going to take, me walking out of there three times before I can get the best deal.
In those kind of cases, let's face it, it's a zero-sum game. Any dollar that's not in my pocket is in their pocket, all right. It's not a long-term relationship. Of course, when you're in the business world, and you're dealing with companies, you have to first differentiate between it is a long-time deal or is this something that's a recurring relationship. One of your podcast, your earlier podcast with Don Klock, who I worked with many years ago at M&M Mars, unbelievable individual, yeah, he talked about that, about the importance of knowing. If this just like a contract project, and you're never going to talk with this deal supplier again, or the next time you're going to talk to them is 10 years, it's very much that one time deal, that one time negotiation, it is a zero-sum game.
You have to think in terms of "Alrighty, is this long-term or is this short-term? Is this one time? Does this go on for years and years?" If you're negotiating, and when I say about timing isn't everything, it's the only thing, people go about routinely, and that do they do? They negotiate one year renewals for everything. I look at that, and I say to people, why is this a one year renewal? Why isn't it a three-month renewal? Why isn't it a three-year renewal? How do you know what's best? Where is the market setting? Are you in an escalating market? Are you in a declining market? Are you in a stable market?
You have to think about the timing and the cycles of things, and when it's not only best to do something, but is it best to be long or short in that market. This is something that's sort of a trader's philosophy. If I see prices under pressure and coming down, why would I book a contract for more than three months? I'd rather go back into the market three months from now, and go after the lower prices. If I see that I'm in an escalating market, I'm going to try to book in a three-year deal with the current prices if I possibly can. A lot of buyers and negotiators, they just don't really study markets like I think that they should.
When we talk about timing isn't everything, it's the only thing, this whole concept of software sellers do with end of month, end of quarter, end of year, and bonuses being at stake, I wish it weren't like that, but the difference between a good deal and a bad deal in IT negotiations is huge. It's just huge. It's not unusual to see somebody cut their price in half, and then when you think about that, how can you price in half? Don't you consider the cost? Well, when you're at a 95% gross margin on the product, cost is irrelevant. This is what's different about the IT negotiations.
When I've run IT procurement functions and I run indirect procurement functions, I always expect the IT procurement function deliver 3X on savings compared to virtually all other categories, because these differences between a good deal and a bad deal are so huge, and because the gross margins are so high, and so therefore, there's a lot more room to play with in terms of what you can negotiate. It's just sort of a rule of thumb that I use. Like I said, people need think about timing more than anything else.
I guess that when I think about negotiations in general though, I've got a few rules that I've always used. The first is that you never learn anything by talking. If you're talking more than 10% of the time, then you're talking too much. Negotiation is about listening and understanding and getting them to talk for them to reveal all their cards to you, and not you to them, not brag about how much you know. You have to put your ego aside, and let their egos run. That's really an important part of the dynamic of negotiation to be successful.
The second thing I've always known is you've got to lower people's expectations. This is like one of the most basic things in negotiation. Anytime you talk with a supplier, you're in a negotiation, anytime. That's the time to always be lowering their expectations from the total value is. There's a good reason why you do that. It's because they have a sales funnel. In that sales funnel, they're plugging in all of their opportunities, how much they think that they're going to be able to sell for, what's the probably of that sale happening end of month, end of quarter, end of year.
Then they do this whole statistical probability analysis, so everything that's in their sales funnel, and then they come up with where they think they're going to end up. The more you can be conditioning them all the time and lowering their expectations, the lower the number they're going to put in their sales funnel. If you end up somewhere that's better than that for them, they see that as win. For you, it's probably a win as well, and so in the end, everybody gets what they want.
Then the last thing, I think, more than anything else. I've thought about this. In my 35 years of negotiating contracts, I had never ever bluffed, not once. I do my homework. I stick to the facts. I know my business requirements. I know my must haves. I know my like to haves. I know my best alternative to a negotiated agreement. I've done my due diligence. I've done all the hard work, and 90% of the negotiation is preparation, but I never confuse strategy and tactics. Bluffing is at tactic. That's the one tactic that can ruin your reputation and your career the first time you get called on a bluff. It was never worth it, truly. My 30-year-old self, that's what I would be telling.
Mark: Fantastic advice. I really loved that you touched on something that I think so many people don't think about, which is conditioning the other party, your second point. It's so critically important to make sure you've got a good ability to condition the other party to lower their expectations. I think it's only going to lead to concessions on their part in being able to get you a great deal. That was excellent advice. I think the bluffing aspect is also critically important. Save bluffing for poker. This is not a poker game. This is business, and you can't be bluffing based on someone else's money in the company.
You need to be doing all the upfront work, doing all the homework, doing all the preparation, doing all the planning to make sure that you can move the negotiation in the direction that you want to. You don't have to bluff to get it to that point. Like you said, when you get caught is when your reputation crumbles. I think those are excellent. All three of those points are excellent, excellent. Thank you so much for sharing.
Howard: Guess what, guess what, sales people talk to each other all the time. They have industry conferences and things. They know, and they compare notes on the people that they're dealing with all the time. In poker, there's a reason for bluffing. Sometimes you want to bluff and actually be caught bluffing, because then they'll never know whether you're telling the truth or bluffing, whether you're holding your cards. There's a purpose to it, but this isn't poker. This is business. This is business on a continuing basis, and your career is something that's a continuing basis as well. That's not something you ever, ever want to happen to you. It's really embarrassing, and it doesn't serve you any purposes.
That whole bit once again about lowering other people's expectations, like I said, it's real important because it actually makes them a winner as well as you're a winner. In the end, everyone will feel good about where you end up on the final result, because they will probably outperform where they thought they would. The psychology of that is really important. You're dealing with people in the end. I've never tried to waste a sales person's time, because time is money to sales people. I've always respected the fact that people have to make a leading. If I tell them there's no opportunity, I tell them that upfront so that they don't waste their time. If there is an opportunity, you've got to set their expectations lower than where they think it is, so that you could probably position it from the upcoming negotiations.
Howard: Just my general thoughts.
Mark: I love it. Great points. Really, really good advice. I think we're coming up close to the end of our discussion. I think we could have scratched the surface of what we probably discussed. I would love to actually do this again with you. I think there's a couple of topics that we can dive deeper into, if you don't mind.
Howard: Oh, I certainly wouldn't mind, Mark. I really enjoyed this discussion.
Mark: Yeah, I really enjoyed it as well, Howard. If people want to reach out to you and find you online, what's the best way to do that?
Howard: I think probably best through LinkedIn. It's Howard Richman, R-I-C-H-M-A-N, and more than happy to connect with people.
Mark: Listen, thank you so much for your time today. I know you're a busy guy. For you to spend the time today and actually do this with me has been a great honor and a great pleasure. I really look forward to doing this again soon. I'm looking forward to hearing all the great comments from people when we do release this online.
Howard: Okay. I certainly am too, but thanks a lot, Mark. I appreciate it. Like I said, I really did enjoy this.
Mark: Yeah. Wonderful, Howard. Thanks again, and have a great day.
Howard: All right, you too. Bye.
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