Recently we were engaged to assist a startup ecommerce company select a third-party logistics (3PL) company. The merchant swore up and down to the prospective it had commitments from Amazon, Walmart and a number of big-box retailers.
Working with the 3PL required electronic data interchange (EDI) for sharing data, and having the 3PL representing a major implementation and operating cost. The 3PL took the deal only to see some of those retailer purchases not materialize. The business plan ended up being flawed, putting the contract and relationship at risk.
Whether it’s software or 3PL services you’re negotiating, it’s important to understand how vendors look at your company and the deal you want to cut. Understanding things from their perspective can help you forge successful vendor relationships.
Here are 9 considerations we’ve found that vendors take into account when evaluating deals:
Selling Process and Effort
How much work is required to get the deal? Vendors may have a tendency to resist answering an RFP because it can be a lot of work. However, having consulted with ecommerce and multichannel companies for 34 years on projects to acquire WMS and 3PL, you’re taking a tremendous risk without an RFP and the requisite analysis. You may spend far more than budgeted, take much longer to implement and not meet your objectives. Far more projects fail without RFPs than when companies take the time and effort to systematically select a vendor.
How Good is the Fit?
Is your company or project in the vendor’s sweet spot and its core skill sets? Both sides need to be realistic about the potential matchup. If it’s a system, is it geared to your size company, and scalable to meet your sales goals? Does it have the functionality required, or are you implementing a system that will require too many which might increase timeframe, cost and risk?
Cost of Implementation
How much will the vendor have to spend to service your account? Does this involve an investment of capital, hiring and adding IT services? There has been a trend toward companies installing systems but extending implementation the fees over the life of the agreement instead of paying them upfront. That may be unacceptable to software companies.
Honesty in the Relationship
Our point is that both the buyer and the vendor need to be straightforward and honest with each other to have a great relationship. We have worked with dozens of startups and emerging companies over the years so we understand the risk and volatility.
Vendors also need to be honest about their company’s capabilities and implementation timeframes. What functionality and services exist today vs. what’s down the road? RFPs and in-depth analysis help clarify this. Companies must be honest about transactional volumes and accurately portray their processes.
Many vendors can only service so many new clients each year, sizing up the revenue and profit of each deal and how it lines up with their business plans. There is often a monthly minimum for services or a total purchase price for software (licenses and professional fees) in order to qualify your deal. The RFP process and the data you provide for pricing and services will help qualify your business from this perspective.
We can’t tell you how many times prospective buyers hype how fast they can make a decision and need a quick implementation. But it ends up being, hurry up and wait.
Let’s say you’re in the market for a 3PL, and the typical customer takes three months to make a selection and another three to four months to implement. However, in evaluating the vendors you give them unrealistic timeframes – like, “We’ll make a decision in two weeks and expect you to install it the next month.” That’s a red flag the buyer doesn’t have any idea of what needs to be done to reach a fair deal and to implement.
Most vendors don’t want you calling references until they are in the final mix for selection, and for good reason. They may be responding to hundreds of leads annually and they don’t want you calling references prematurely, wearing out their good will. Do your homework, get through the RFP process, see comprehensive demos and then call references.
Assessing Business Risk
There are many different factors in evaluating risk. Often business owners want onerous contractual clauses about liability for damages to their business. We are not legal counselors so we cannot address this adequately. We will say that there are very few cases where buyers have been successful in getting this into a contract; oftentimes vendors balk and walk at this requirement.
There is another aspect of risk with clients: Getting paid on time. For example, as the cost of shipping keeps increasing, who pays the freight in a 3PL contract definitely enters the equation. The 3PL may be able to provide lower shipping costs based on volume discounts using their carrier account, but they have to pay the carrier invoices on time. For businesses that appear to be riskier the 3PL may want you to use your own account. Vendors may ask you to provide credit references as part of the selling process.
From the buyer’s perspective, don’t let the salesman short circuit the team’s selection steps and due diligence, but the team also needs to be realistic. The final deal will not be struck until both decision-makers on both sides meet and talk directly. The account rep probably doesn’t have authority to commit his company. Many times, they have to sell higher-ups on why this is a deal they should take.
To reach a “win-win”, both sides – merchant and vendor – must understand what the other sees as risks and obstacles to closing the deal, as well as the potential benefits. Happy hunting!
Brian Barry is President of F. Curtis Barry & Company